Manager speak: Binay Chandgothia, head-fixed income, IDBI Principal Mutual Fund
What is your outlook on interest rates?
We have a stable to bullish stance on interest rates. We expect a continuance of the debt market rally in the lead up to the credit policy. The Central Bank has reiterated its soft interest rate bias and we believe that they may cut rates in the forthcoming credit policy. The bank rate could be cut be cut up to 50 basis points to 6 per cent and the repo rate could be cut by 25 basis points to 5.50 per cent in one or multiple stages. We have positioned our portfolio accordingly.
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Isn't a portfolio maturity of 5.8 years a bit on the higher side for a plain vanilla debt fund?
The portfolio maturity appears higher than normal due to the impact the 30-year gilts that were recently added by us to the portfolio. The 30-year bonds give us the advantage of positive convexity while not unduly expanding the interest rate risk in the portfolio. The approximate modified duration of the portfolio is about 3.7 years; implying a 3.7 per cent price sensitivity on a 100 basis points move in interest rates.
You allocation to government securities had jumped up to about 40 per cent? Why have you increased it and doesn't that make your fund volatile?
We increased allocation to gilts as spreads in the corporate bonds have narrowed significantly over the past few months. We started fiscal 2002-03 with AAA manufacturing spreads of 200 basis points. that has narrowed to 100 basis points currently. Going forward we don't see any further significant spread compression, though liquidity could drive spreads down to 80-90 basis points for short periods.
Also, some part of our gilt allocation is also in short maturity papers which don't add duration risk over corporate bonds of similar tenors while offering better liquidity.
On the issue of portfolio volatility, gilts are more volatile only on a daily basis, as they get traded thickly and the price change is captured immediately in portfolios.
Against this, corporate bonds may take an additional day or two to get repriced fully; but for medium-long term investors, it should not make a material difference.