K. Ramanathan

"Our Investment Philosophy is to provide superior risk-adjusted returns on a consistent basis " says, K. Ramanathan, Fund Manager, Birla Income Plus

1. How do you see the market situation today? What according to you is the interest rate outlook? How is it going to affect the performance of Debt Mutual Funds?

RBI's softening bias to interest rates continues. Liquidity is adequate, inflation is benign and forex reserves are comfortable. In this backdrop we expect interest rates to remain range bound going forward. While we do not expect significant upward movement in interest rates, we expect the steepening of the yield curve to gain momentum in the 1st quarter of FY2003. Corporate spreads are today around 200 bps. We expect the corporate spreads to shrink in the new financial year. This should positively benefit income funds, which typically have around 60% in corporate papers.

2. What are the different debt instruments available for a debt fund manager for investments across the maturity and yield curve? Please explain each one of them briefly in the increasing order of their maturity?

Mutual funds can invest only in transferable securities. The various instruments available across maturities (in the increasing order of maturity) is given in table below:

3. What is your outlook on the forex front?

Over the past 1-year forex reserves have increased by around US$ 9 bn and at US$ 51.5 bn the forex reserves are comfortable. Inspite of a rise in international oil prices we expect the current account deficit to be at manageable levels. Hence, we do not expect significant volatility on the forex front.

4. Do you think our economy is into a recession following the global trend? When can we expect an economic upturn or has it already been started?

The economic growth has faltered but surely we are not in a recessionary situation. While we are seeing a slight pickup in some segments of the economy in the recent months (like cement, coal etc.) we are not seeing a broad based recovery. We also do not expect this to have a significant impact on inflation due to existing excess capacities in most of the commodity segments. We expect inflation to average around 3.5 - 4% in FY2003.

5. What steps should to be taken by the government to come out of it?

Stimulate investment demand by sustaining momentum that we are seeing in roads (NHDP's golden quadrilateral highway project which is progressing ahead of schedule) and housing.

6. Tell us something about Birla Mutual Fund's Investment Philosophy.
Investment Philosophy

Our Investment Philosophy is to provide superior risk-adjusted returns on a consistent basis, through a rigorous research driven investment process.

Investment Methodology
Risk control
In a Fixed Income Portfolio, risks are associated with liquidity, credit quality, asset-liability mismatch, interest rate fluctuations, etc. Our business model aims at addressing each area of risk, at all stages: Research, Portfolio Construction, Portfolio Review, Back Office, Compliance etc.

Fundamentals
Our aim is to constantly improve our understanding of the businesses in which we invest. We prefer businesses that are expected to remain competitive well beyond our duration of investment. In debt investments, we lay emphasis on cash flows and all liabilities of the company. We also consider macro-economic fundamentals. Finally, we aim for an optimal mix of duration, yield, and type of securities, so that we can enhance returns while reducing the kinds of risks mentioned above.

Quality of results follows from quality of process. If the process is good and consistent, the investment results will be good. Our investment process rests on the following basic tenets:

• Strong in-house research - we prefer to work on the investment ideas on our own, using outside agencies for back-up data.
• Our approach is hands-on and intensive. We spend a lot of our time in analyzing macro-economic fundamentals that affect interest rates, constantly reviewing the credit quality of companies where we have invested and meeting market players, to enhance the quality of decision making. This approach leads to thorough evaluation of all relevant issues, leading to better investment decisions.
• We believe that a team approach and disciplined adherence to the process are factors that will ensure top quality decision-making on a sustainable basis.