DSP Merrill Lynch Mutual Fund is coming out with a new fund offer - the Strategic Bond Fund. The fund will invest in fixed income assets. Dhaval Dalal of DSP Merrill Lynch said the new fund would invest in the short-end of the money market curve because that segment is giving higher returns as compared to the risk. Going forward, once the fund senses that interest rates are likely to come down, it will gradually increase the duration profile and take advantage of the declining interest rate scenario. (View - New Fund Offers open NOW)

Excerpts from CNBC-TV18's exclusive interview with Dhaval Dalal:

Q: What did you make of the credit policy today and the kind of stance that the RBI took?

A: The bond market has appreciated RBI’s views on the credit policy and the economy as a whole. Going into the slack season, the apex bank has done the right thing by keeping rates unchanged while flagging further pressure on inflation and global macro-economic situations.

Q: Are you expecting any more tightening to come through for the rest of the year, given that the focus is going to be at inflation under 4.5%?

A: There will be one more rate hike somewhere during the next six months. May be after that RBI will stay put for quite some time.

Q: Walk us through the fund now, what is the fund, what do you hope to do with it, what is the duration and what kind of returns can we expect?

A: We have come out with a strategic bond fund keeping in mind RBI’s view on the economy. We feel the economy may slowdown going forward and that will probably have a positive impact on interest rates in the next six months or so. Going forward, our strategic bond fund will try to take advantage of the declining interest rate scenario. The fund has an ability to invest in all fixed income asset classes right from daily put-call assets to government securities.

Initially, the fund will invest mostly in the short-end of the money market curve because that segment is giving you higher returns as compared to the risk. Going forward, once the fund senses that interest rates are likely to come down, it will gradually increase the duration profile and take advantage of the declining interest rate scenario.

Q: What is the interest rate swaps that you would be using in this fund to change the duration? Could you elaborate a little more on that?

A: The fund will try to use interest rate swaps in order to control the downside risk of the portfolio, should the rates rise very sharply from the present level. In the absence of that the fund will try to minimize its uses of swaps in the fund.

Q: How are you working the particular interest rates swap aspect in this fund?

A: Interest rate swaps are going to be used majorly to prevent the downside risk to the portfolio, should interest rates rise very sharply from the present level. In the absence of that we will try to use swaps to control the duration of the portfolio very effectively and very efficiently.

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