23rd February 2012

WF : Has the CRR cut done enough to tackle liquidity concerns for now, or do you see liquidity remaining an issue in the run up to the fiscal year end?

Vikrant : The CRR cut infused liquidity to the tune of around 30,000 - 35,000 crs. While the CRR cut provided some respite, the system continues to remain in a deficit mode. The banking system has been borrowing in excess of 2% of NDTL (Net Demand and Time Liabilities) for a considerable period of time, and the advance tax outflows in March 2012 are likely to further impact liquidity in the near term.

WF : How real is the concern that once the FII limits get fully utilized sometime this month, liquidity pressures may get heightened?

Vikrant : Liquidity pressures getting heightened post utilization of FII limits is not much of a concern. The utilization of FII limits is applicable for debt, and not equity portfolio investments which have been robust this calendar year. The outflows on account of advance tax are probably more likely to impact liquidity.

WF : What is your reading of the short end of the yield curve? What are the factors that are likely to drive it over the next 6 months?

Vikrant : Short term rates have risen significantly over the past month on the back of tight liquidity, refinancing of existing borrowings and on account of funding balance sheet expansion by the banking system. Markets are increasingly anticipating a CRR cut or liquidity positive measures prior to the mid quarter policy review in March 2012. Efforts to alleviate the stress on liquidity, and/or front loading of widely expected repo rate cuts over the calendar year will positively influence short term yields.

WF : How are you positioning your Short Term Income Fund?

Vikrant : The AIG Short Term Fund had a maturity of around 7 months as on end January 2012. Money market yields are currently at attractive levels (3 to 12 month CDs @ 10.15%-10.35%). At this juncture, the fund seeks value at the shorter end of the curve on a risk adjusted basis. Easing of CRR requirements or a repo rate cut is likely to contribute to a soft bias in short term yields, and could add to fund performance.

(Source: Bloomberg)

WF : What is your prognosis for the long end of the curve and what will drive it over the next 6 months?

Vikrant : The long end of the curve has rallied substantially over the past 3 months. While a further rally in bonds cannot be ruled out, fiscal imbalances can lead to large issuance of government bonds next financial year. Thus, efforts on fiscal consolidation are likely to weigh on the markets. Furthermore, in spite of the considerable recent fall in inflation, it (inflation) is still likely to remain above the comfort zone of the RBI, thereby leading to uncertainty on the pace of future rate easing actions from the RBI.

WF : Do spreads on corporate bonds make them an attractive investment option now or would you stick with Government bonds?

Vikrant : Government bonds are probably an ideal vehicle to capture the momentum play in the markets. Credit spreads currently are at attractive levels. A combination strategy of both asset classes would perhaps deliver reasonably attractive performance.

WF : What will be the likely impact of the new 60 day MTM guidelines on ultra short term funds? Will these guidelines make this category unattractive?

Vikrant : The expected 60 day MTM guidelines are likely to lead to a possible reduction in the average maturity of ultra short term funds.

Disclaimers:

The views have been expressed by Mr. Vikrant Mehta, Head - Fixed Income, AIG Investments (India). These views above alone are not sufficient and should not be used for the development or implementation of an investment strategy. Parts of the views may be based on information received from sources we consider reliable. It should not be construed as investment advice to any party. All opinions included in this constitute our view as of this date and are subject to change without notice. We are not soliciting or recommending any action based on this material. Neither AIG Global Asset Management Company (India) Private Limited, nor any person connected with it, accepts any liability arising from the use of this information. Recipients of the information contained herein should exercise due care and caution and read the Scheme Information Documents (including if necessary, obtaining the advice of tax / legal / accounting / financial / other professionals) and Statement of Additional Information prior to taking of any decision, acting or omitting to act, on the basis of the information contained herein. The recipient of this material should rely on their investigations and take their own professional advice.

AIG Short Term Fund: Scheme Classification: An open ended income scheme. Investment objective: The primary investment objective of the Scheme is to seek to generate income from a portfolio constituted of short to medium term debt and money market securities. Asset Allocation Pattern: Debt* and money market securities with average maturity less than or equal to 370 days or have put options within a period not exceeding 370 days - 40% to 100%; Debt* Instruments including Government Securities, Corporate Debt and other debt Instruments with average maturity greater than 370 days - 0 % to 60 %. *Debt securities may include securitized debts upto 75% of the net assets. Load Structure: Entry load: NA; Exit load: 0.25% if redeemed within 90 days.

Risk Factors: Mutual Funds, like securities investments, are subject to market risks and there is no guarantee against loss in the Schemes or that the Schemes' objectives will be achieved. As with any investment in securities, the NAV of the Units issued under the Scheme can go up or down depending on various factors and forces affecting the securities market. Investments in the Scheme will be affected by trading volumes, settlement periods, volatility, price fluctuations, inability to sell securities, disinvestment of holdings of any unlisted stocks prior to target date of disinvestment, credit risk, currency risk, country risk, interest rate risk and default risk including possible loss of principal. As the price / value / interest rates of the securities in which the scheme invests fluctuate, the value of your investment in the schemes may go up or down. Past performance of the Sponsor / AMC / Mutual Fund does not guarantee future performance of the scheme.

AIG Short Term Fund is the name of the Scheme and does not, in any manner, indicate the quality of the Scheme, its future prospects or returns. The sponsor is not responsible or liable for any loss resulting from the operation of the scheme beyond the initial contribution of ` 1 lakh made by it towards setting up the Fund. The present scheme does not give any guaranteed or assured return. In addition, the scheme does not guarantee or assure any dividend and also does not guarantee or assure that it will make any dividend distribution, though it has every intention to make the same in the dividend option of the plans. All dividend distributions are subject to the investment performance of the Scheme. The Scheme and individual Plan(s) with a separate portfolio, if any, under the respective Scheme(s) shall have a minimum of 20 investors and no single investor shall account for more than 25% of the corpus of the Scheme(s)/Plan(s). In case of non-fulfillment with either of the above two conditions, specified SEBI Guidelines in this regard would be complied with. Mutual fund investments are subject to market risks. Read all scheme related documents carefully.

Statutory Details: AIG Global Investment Group Mutual Fund ('the Fund') has been established as a trust under the Indian Trusts Act, 1882, sponsored by AIG Capital Corporation (liability restricted to Rs 1 lakh). AIG Trustee Company (India) Private Limited, a company incorporated under the Companies Act, 1956, with a limited liability is the Trustee to the Fund. AIG Global Asset Management Company (India) Private Limited, a company incorporated under the Companies Act, 1956, with a limited liability is the Investment Manager to the Fund.

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