Overweight on banking, oil and gas: HDFC MF

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Q: What would you be telling your investors on the fixed income front for 2010, given expectations of rising interest rates?

Barve: I think the debate is only about the trajectory and the pace with which interest rates will rise. As we have already seen that yields at the shorter end have already sharply gone up, I would say put in a little bit of caution to investors if you are investing in medium and long bond funds. There is a period of tightening that we see happening over the next four-five months. One would believe that going closer to sort of September or so you should see some easing off of interest rates because we believe that the trendline on inflation will begin to come down with the benefit of base effect. I would give a bit of caution on investing in the medium and long end.

At the shorter end which is the liquid or the liquid plus or the aggressive liquid funds, I think these funds are fairly insulated from these interest rate risks because they have extremely short durations on their book and investing in them, you might be compromising a little bit of your return, but you are clearly buying security and reasonably trendable sort of return in those products. So I think those products will continue to find a favour from investors. But at the medium and long duration bond funds, I would recommend a bit of caution and not being significant having significant amounts in that.

It is very difficult for retail investors to time that market based on the movements of interest rates particularly at the 10-year of the yield curve and it is very difficult to communicate those movements. There are opportunities which are very short, we find it very difficult to communicate it through our distribution channel and we therefore are airing on the caution and saying one should stay a little bit careful.

I think the ideal fund, for example, if you want something which is better than a liquid fund or better than an aggressive liquid fund, we are clearly recommending something like MIP or a monthly income plan which is more an hybrid, had 75% in fixed income with reasonably moderate duration and about 20-25% in equity. We think that is an asset allocation which is striking a cord with investors, we believe it is a right sort of asset allocation for people who don't want to be fully invested in equity, may have their own view of whether it is valued fairly high or low, but they want returns which are better than these liquid fund returns and certainly better than bank deposit return on a tax adjusted basis. I think the one fund that I would pick is to be invested in an MIP which gives you a better return than these liquid type of funds and gives you a little bit of possibility of appreciation through the equity allocation. So the 75-25%, 80-20% are the kind of asset allocations for people who don't want to be fully invested in equity. I think that is the product I would put my money on.