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Thursday, Feb 12, 2004

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MF investments point to hardening interest rates

Sanjiv Shankaran

Chennai , Feb. 11

PEOPLE who invest largely in company and bank fixed deposits may be in for a pleasant surprise as recent changes in bond investments by some mutual funds signal the chance of a rise in interest rates.

Funds such as Franklin Templeton and Birla Sun Life have switched to bonds with a shorter life because they are safer when money managers are unsure about interest rate trend. One of Birla's fund managers, Mr A. Balasubramanian, described the move towards shorter bonds as a "de-risking strategy."

Some in the business feel that rates are set to rise. Mr Anand Radhakrishnan, who manages a bond fund at Sundaram Mutual, said his fund had switched to shorter bonds because they expect an increase in interest rates. Another fund manager, Mr Nilesh Shah of Franklin Templeton, felt that interest rates could increase in the long-term, but not in the immediate future.

Fund managers felt the spark for a rise in interest rates could come from either strong economic growth or an increase in inflation. Another possible spark that was mentioned was the pull exerted by an increase in rates in developed economies.

"We are expecting a structural reversal," said Mr Radhakrishnan about the likely cause for hardening interest rates. He felt that a surge in economic growth would lead to banks lending more funds to the industry, which would eventually push up interest rates.

Some in the mutual fund industry felt the key mover of interest rates could be inflation. The logic being that the Government would aim to keep interest rates low to help industry expand, but their hold over inflation appeared limited.

While interest rate forecast is made up of many ifs and buts, the direction of mutual fund investments suggests a section of the industry does not expect the interest rate to trend downwards any longer.

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