"Interest rates will continue to move downwards"

MANAGER SPEAK/ Nandkumar Surti, Head Of Fixed-Income, JM Mutual Fund

 Nandkumar Surti, Head Of Fixed-Income, JM Mutual Fund

 

  What is the outlook for income funds in 2004?

 Inflation, global interest rate outlook and the new liquidity adjustment factor (LAF) could decide the interest rate movement over the medium-term.

 

 We expect inflation to come down starting January 2004 and RBI to introduce the new LAF rules gradually to ensure that it does not impact market sentiment adversely. We do not expect global interest rates to surge unless the world economic recovery is very strong.

 We believe that inflation is only likely to inch down and interest rates will continue to move downwards from January onwards.

 However, the downward movement is likely to be around 25 basis points. Investors should choose debt funds based on their investment horizon. They should preferably have a mix of money market, short-term and income funds and floaters to hedge against market volatility.

 Why do you have such a high proportion of gilts in our portfolio?

 The Fund periodically looks for market segments which could outperform in the future. Based on these expectations, prudent exposure norms to corporate Bonds, gilts and money market instruments are decided.

 Barring new developments adversely impacting the market outlook, the fund does not change the asset allocation.

 What is the rationale behind maintaining a high portfolio maturity when you are not wildly bullish on interest rates?

 Higher portfolio maturity is due to the fact that the fund has invested a higher proportion of its assets in gilts.

 With corporate spreads over gilts touching a low of around 55-65 basis points two months back, we preferred to increase holdings in g-secs while booking profits in the corporate bond segment.