& #39;Debt Fund Returns May Be Expected At 6.50-8.50 Per Cent & #39;

Manager Speak: Binay Chandgothia, fund manager, IDBI Principal

What is your medium-term outlook on the market? Was the correction long overdue or was it mainly due to event risks?

Our medium-term outlook on interest rates is positive from the current levels of about 6.75 per cent for the 10-yr benchmark. The yields today are higher by about 80-90 basis points from mid-January levels.

This correction has been to due to a mix of factors- both fundamental and technical. In January, when yields touched 5.85 per cent, the term spreads had narrowed far too much, the market was running at over-leveraged positions and there was uncertainty on the US-Iraq front.

So the first 40-50 basis points of the correction was expected. The yield rise thereafter was surprising and was the result of market players wanting to reduce interest rate risk in uncertain times (US-Iraq tensions, Budget, tighter liquidity, etc). We think that these levels are fundamentally levels to buy.

Given that the markets are volatile, what is your investment strategy? Have you hiked the cash allocation?

Over the past few weeks, we have increased our cash allocation to 10 per cent from earlier levels of five per cent by reducing exposure to long duration bonds.

While maintaining enough exposure in liquid cash/assets, we are now utilising the cash partly to buy assets at attractive yields, given that most of the correction in yields seems to be over. We feel that the correction is almost over and that buying bonds now would lead to superior returns from investments.

What kind of returns will debt funds as a category generate?

The days of double digit returns seem to be over for now at least. However, investors who are looking to put their money in debt funds at current yields are likely to get between 6.50-8.50 per cent returns which is quite attractive given the low level of returns from alternative investments.