WF: Can you please take us through the Current Account model, which seems to drive portfolio strategy in your Long Term Plan?
Raghav: ICICI Prudential Long Term Plan (LTP) works on in-house model of Current Account Deficit (CAD) index along with a few other factors, to take duration call. The model compares the CAD and the market levels to give an idea what kind of duration the fund should run. The emphasis on CAD is because it has a strong correlation with interest rates. Between 2013 and the last financial year, CAD has improved from 4.5% to 1.1%. Correspondingly, this period has been marked with falling interest rates. So, this co-relation clearly works.
WF: Have there been occasions in recent years when the inverse relationship between CAD and interest rates did not actually pan out?
Raghav: There may be instances of extreme volatility in the market for shorter periods but when we look at medium term, this relationship holds true. Therefore, we ask our clients to invest in this fund with a medium term investment horizon.
WF: Given your recent stance in reducing duration in the portfolio, and many experts' opinions suggesting that the best of the bond rally is now behind us, what is the investment argument in favour of a dynamic bond fund like your Long Term Plan?
Raghav: LTP aims at a total return strategy which is achieved by the accrual income earned by corporate securities, certificate of deposits and commercial papers. At the same time, capital appreciation can be expected from fall in Government bond yields.
The model currently is suggesting that the markets are not as cheap as it was six months earlier and therefore the fund has reduced its duration. However, going forward if economic variables may improve, there can be further rally in bonds, going ahead. On the other hand, if the model suggests further reduction in duration, then the fund can earn a carry through by investing in more carry instruments than duration.
WF: What is the outlook for LTP from a three year perspective?
Raghav: A conservative investor can opt for accrual funds and moderate risk investor can go for LTP which will give the benefit of both duration and carry over the next three years.
WF: How has the investor experience been in LTP?
Raghav: The investors who have invested in LTP have made substantial gains over traditional investment avenue as represented below
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