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The central bank's position on the interest rate regime is an extremely important consideration. A change in RBI's bias towards interest rates is perhaps the biggest concern that a market participant may have in the days preceding the credit policy.

DSP Merrill Lynch Mutual Fund has recently been in the news, thanks to its attempt to introduce new products as Top 100 Fund and Savings Plus. These, according to Mr Dhawal Dalal, Fund Manager for debt schemes, including the flagship Bond Fund, are expected to help DSP ML penetrate deeper into the market and add to its existing strengths.

Here, Mr Dalal shares his ideas with Business Line.

What sort of investments have you made lately for the Bond Fund? What prompted you?

We have consciously added liquid corporate papers to our portfolio in order to take advantage of high corporate spreads but without taking too much interest rate risk.

As professional investors, we believe corporate spreads are likely to come down from their current levels in the new financial year. The fund, we hope, will benefit by getting into these liquid, medium-term corporate issues.

This will gel with our overall plan to generate good returns from assets that are significantly made up of high-quality debt. This is reflected in the fund's sizeable investments in AAA-rated securities.

What have been your large holdings recently? Can investors expect broad changes in your portfolio in the near term?

In the run-up to the Credit Policy, it is natural that market participants may look to carrying more government securities in their portfolios.

As you may know already, there are expectations of cuts in the bank rate and cash reserve ratio (CRR) in the market, which may happen in or around the Credit Policy. It needs to be seen whether these expectations actually materialise and how the market reacts to them.

In recent times, the Bond Fund has held such Triple-A corporate debt as LIC Housing Finance FRN 2012, SBI 2008 and Nalco 2005. On the g-sec side, it has held 9.85 per cent 2015, 11.5 per cent 2011, 7.4 per cent 2012 etc.

What is your top concern in the run-up to the credit policy?

The central bank's position on the interest rate regime is an extremely important consideration. A change in RBI's bias towards interest rates is perhaps the biggest concern that a market participant may have in the days preceding the credit policy. Although this is unlikely, if the RBI does propose to re-adjust its bias from soft to neutral, this may lead to some discomfort in the market, especially so ahead of the government borrowing.

As a fund manager, are you interested in floating-rate paper?

A few funds have already come out with schemes based on this concept and a few others are waiting to be launched. Floating-rate securities are always useful in reducing volatility of a portfolio. As an instrument, an FRN is also suitable for those who have a buy-and-hold strategy in a volatile investment climate.

Floating-rate paper exhibits similar risks when compared to a fixed-rate security. However, the former demonstrates comparatively lower interest rate risk (when compared to its fixed-rate counterpart) due to the periodic re-setting of coupons.

Are you fully invested now?

No, we are running two-five per cent cash across our fixed-income funds.

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