It Makes Sense To Invest In Gilts

Manager speak : Saravana Kumar, fund manager, Magnum Income Fund

What is your outlook on interest rates?

I expect the market to remain range-bound. We don't expect a big-bang rally, but there exists a softening bias. I expect the 10-year government paper to settle around seven per cent and also that the repo rate and bank rate will be cut by 25 basis points each in the forthcoming credit policy. This is because credit offtake is quite low and looks like it will remain low for a while. Also, liquidity in the system is quite high. Also, I don't expect government borrowings (net) to cross Rs 95,000 crore.

At a time when most funds are raising their exposure to lower-rated papers in pursuit of higher yields, you seem to be reducing it. What's the logic?

We have increased exposure to financial institutions like Power Finance Corporation and IRFC, which are triple A-rated but deliver almost the same yields as double A-plus manufacturing companies. It seemed logical to invest in such papers.

Does that mean you aren't willing to compromise on yields at all?

There is a bit of a compromise. But we are compensating for it by trading more actively. We have a 35 per cent exposure to gilts, and trade on this portion quite aggressively. Also, we are not buying corporate papers in the primary market and selling them in the secondary market. There are good gains here also.

But isn't this a risky strategy? Especially for a plain vanilla debt fund, doesn't it add to volatility?

To some extent, it does. But it makes immense sense to invest in gilts when rates are softening. For instance, we invested Rs 30 crore each in HDFC's four- year paper and the 7.4 per cent 2004 government paper at the same time. While I have gained about Rs 90 lakh by way of appreciation on the government paper in the past two months, the HDFC paper has appreciated by only Rs 12 lakh. Evidently, a higher gilts allocation is desirable even when rates are falling. Most funds in the industry maintain a 30 per cent exposure to gilts.