WF: What is your outlook on the markets post the credit policy - especially on the short end of the curve? How have you been positioning the Reliance RSF Debt fund in these market conditions?

Prashant: The market expected 50 bps of a CRR hike - the 75 bps move was a surprise. Looking at overnight numbers in the market I think there will be some amount of liquidity tightening as we enter March because there is advance tax out flow which could impact the market on a temporary basis. Post that lets say in a couple of weeks the budget will be out. There have been comments saying that net borrowings would actually be the same as this year's net borrowing - which means that the gross borrowing will be higher. And once those numbers are out, obviously there will be concentration of borrowing in the first half which will further impact the liquidity as we get into the next financial year i.e 2010-2011.

Over and above that, we are also slightly skeptical about the credit growth which even from the current level if it grows to 17-18%, that is going to demand a reasonable amount of liquidity in the market. Therefore, the soft rates we have seen in overnight and the shorter end of the curve over the last 6-7 months - are unlikely to be seen over the next 6-7 months.

The important thing to keep in mind is that in a rising interest rate scenario, you need not completely keep off duration funds. It is not necessary that when interest rates are going up all the durations will get hit. There are protections on some part of the curve. That is the protection we were searching for on the curve, which in the last one month we thought is in the 2.5 years to 3 years segment - which is reasonably protected on the curve. In our Reliance RSF Debt fund, we have used this opportunity.

Three year yields are around 7.65 - 7.70 levels as compared to two year which was around at about 6.75 levels - and which has already moved upto 7.10 - 7.25 levels. While the 1 year and 2 year have made significant moves, the three year hardly mved up by 10-15 bps. So our strategy two months back was get into to the 2.5 year to 3 year segment - you are anyway getting a 70 to 80 basis point higher carry in the three year. At the same time you are also protected on your 3 year because of the steepness of the yield curve. That worked well for us. Now that everything i.e. your 2 year and one year had moved up, we have slowed down on a 3 year, rather we would be actually looking to off load some of the three years and get into two years NBFC's of Non PSU's which are available around 7.5 % levels. We also looked at 3 year NBFC's around 8.60 to 8.75 levels - which are now trading around 8.30 - 8.35 levels right now. We still feel that the 2 - 3 year segment in the curve is more protected as it is already pricing in a 150 basis point interest rate hike.

In RRSF Debt, we don't concentrate on segments above 3 years. It is maximum 3 years. Our strategy since Jun-Jul 09 was get into a 2 year NBFC which was available around 150 basis point over a PSU. We had a view that spreads would contract. From 170 bps spread levels, they did in fact contract all the way down to 50-60 bps. Apart from the spread compression play, you also get to roll down the yield curve wherein these papers could be sold in the market with a 1.25 - 1.5 years residual maturity and again replaced in the market with 7.5% 2 year paper, thereby giving you an extra carry of 70 to 80 basis points.

In RRSF Debt, both our key calls - spread compression and protection in the 3 year segment have played out well. We maintain an average modified duration of close to 1.5 years.

WF: Why do you have a 12 month exit load - considering the relatively shorter term durations of your underlying assets?

Prashant: We feel that for any spread contraction or any yield curve play to materialize into competitive returns, it takes at least 6 to 9 months, for the entire curve to take place. Secondly, RRSF is positioned more for individual investors rather than institutional players. We don't keep large amounts of cash in this fund - unlike our short term fund where we keep 55% to 60% very liquid. There we have chunky money and institutional clients.

RRSF is meant for individual investors where money would stay stable, so that I can take slightly long term calls and which should be translating into at least 70 to 80 basis point or 100 basis points more returns only on behalf of accrual over a short term fund.

I think that has materialized to some extent because of in last six months our short term fund has yielded close to 5.65 - 5.75% return where as this fund has given close to 8.25% return.

WF: What should an investor reasonably expect over the next one year from RRSF Debt?

Prashant: One year I think they can expect returns of around 7.25 to 7.5% on a net basis for this kind of fund.