Q:  What is your investment philosophy?

A : Safety of the investment in our fund is the first and prime concern. Our investors are entrusting their capital to us to generate returns higher than the rates available in traditional bank accounts with easy access to the funds on a short notice.

Since this money can be withdrawn at any time by investors our philosophy is to invest in several short term bonds or certificates of deposits but with the safety of principal. The ING Liquid Fund is a money market fund and investors use the fund as an alternate to current accounts in India that earn no interest and savings accounts where the retail investors earns less than 3.5% return.

Given the nature of the product, wherein the investor comes in and goes out within a short period of time, based on his cash flow requirements you typically have three concerns while investing – the safety of the money, the liquidity of the portfolio and investment return. We are looking to guard the safety of investment first, liquidity second, and then the returns.

Q:  What is the investment strategy?

A : The tenure of investment typically ranges from two days to three months or possibly longer. Currently, a significant portion of investors in the fund is comprised of institutional investors, although we have a good sprinkle of high net worth retail investors who are more stable investors.

We choose the highest rated debt instruments. The second portion because our liabilities are short-term in nature; you could have volatility in terms of your AuM movement so it is important for us to stay liquid. A good percentage of the assets are invested in commercial paper and certificates of deposits, which are liquid.

Q:  Are commercial paper and certificates of deposits market deep enough to meet your liquidity needs?

A : The tenure of the certificates of deposits is typically seven days to one year in maturity. Some financial institutions can issue longer CDs, however with the nature and the risk profile of the fund we have a tenure restriction that we can’t invest in any instrument that has longer than three months of maturity.

The daily trading volumes for CDs in both primary and secondary markets trading could be in the range of 1,000 crore rupees to 1,500 crore rupees. So the liquidity in the market is deep enough for us. In terms of the commercial paper, the volumes are lower compared to the certificate of deposit market however, the daily trading volumes could be anywhere between 100 crore rupees to 200 crore rupees.

In terms of trading, the certificate of deposit market is about ten times bigger than the commercial paper market.

Q:  What kinds of other debt instruments you diversify into?

A : The fund is mostly in the short term corporate bonds ranging from commercial papers, certificate of deposits, short-term securitized instruments to short-term debentures. For temporary placements, we use the repo market to place surplus cash that we want to have immediate access. These instruments could be either fixed rate or floating rate depending on the requirement or the view on the short-term interest rates that we take on a daily basis.

We invest in Treasury bill although the percentage allocations are low because the spreads on corporate bonds are attractive at present. We would like to bucket the investments into one, two and three months because we can’t invest in any maturity that is beyond three months from the date of investment.

In the Indian market, we have seen that there is a particular pattern of inflows and outflows.

Corporations end fiscal year in march and companies are required to pay quarterly taxes in advance so that at the end of the month the needs of liquidity are very high. Typically in the fund, you have 40% to 50% of the maturities skewed towards the three-month instruments to meet the quarter end issues. In march most of the liquid funds like ours see outflows because the corporations do not like to show these investments in the balance sheet; they would prefer to show it as cash. Banks that also invest in liquid funds prefer to withdraw funds at the end of the fiscal year.

There is a particular pattern of investors who come in and go out and broadly you can know when they would redeem the funds. So, ALm is quite important in the case of liquid funds.

Q:  Are there lot of corporate bonds available that have less than 30-day maturity?

A : Most corporate bonds are issued with three months maturities and bonds with one month maturities are fewer. Typically, the three-month segment is what we buy from the primary market. We have close to 100 companies in our approved issuers list and they issue bonds on a regular basis and default rate for these companies is almost zero.

Q:  What are the current yields and yield spreads in the 90-day market in the corporate sector?