Rates Will Continue To Fall

Manager speak Dhawal Dalal, fund manager, DSP ML Bond Fund

You have increased your exposure to government securities at a time when other funds are paring their exposure. What is the rationale behind this move?

We feel that over a time period of six months plus, government securities will outperform corporate bonds. Usually what happens is, that, in the first and second quarter interest rates tend to harden a bit since the majority of government borrowing is carried out during this period.

Then, in the third and fourth quarter, due to lack of borrowing, liquidity in the system pushes the yields on government securities 15-20 basis points lower. Though it is a little early, we are positioning our portfolio to take advantage of that situation.

What is your investment strategy for the year?

We see sustained demand for short-term corporate bonds this year and hence we will focus on this segment. We will also be maintaining about 10 per cent of the fund corpus in cash to enhance our liquidity position. It will be in addition to our holding in government securities.

What is your outlook on interest rates?

Given the liquidity in the system and the global interest rate levels, we expect interest rates to continue to decline. We expect the yield on the 10-year benchmark government security to be around 7.50 per cent.

With the interest rates coming down, what will be your strategy to maintain a decent yield on the portfolio? What returns do you expect to generate this year?

We are targeting a one-year return in the range of 8-9 per cent from here on. As far as our portfolio positioning is concerned, we determine the maturity of our portfolio consideringthe yield curve rather than having pre-set targets.

As of now, the average maturity of our portfolio is 4.4 years. We have only about six per cent exposure to AA papers at the moment. We are not inclined to increase our exposure to this segment now.