It may be recalled that income funds had held a majority of their investments in the shorter term on account of interest rate uncertainty. What seems to have prompted some funds now to invest in longer term assets is their expectation that interest rates will remain flat in the short-term.

``If interest rates go a little lower, it will definitely prop up the prices of securities in the secondary market and lead to some profit booking,albeit not substantially,'' says the head of a private sector asset management company. Concurs a fund analyst, ``the average returns from these funds have seen a fall in 1998, given their high exposure to the short-term instruments. Hence, investing in long-term to earn some trading profits can help them post a little better returns.''

Take for instance, Prudential-ICICI Income Plan. The fund's average maturity profile has gone up from 9 months on September 30, 1998 to 20 months on January 13, 1999. ``Inflation, which was a cause for worry, has come off substantially. Ample liquidity in the system caused by low credit offtake and high deposit growth would act as a dampener on any sustained interest rate rise but there could be spikes due to temporary liquidity mismatches,'' says Dileep Madgavkar of Prudential ICICI. On the other hand, Kothari Pioneer has reduced the average maturity profile slightly even as the fund manager believes that interest rates will remain steady. ``We want to insulate ourportfolio from any interest rate risk even though government cannot afford to put pressure on interest rates through increased borrowing as it will stall the starting of economy's expansion,'' says fund manager R Sukumar.

``I do not see any major government borrowing as it has got excess money on the small savings front. On the other hand, a large number of redemptions will ease the pressure on interest rates, at least till March, 1999. This could help us book some profits on longer-term bonds,'' adds a fund manager with a mutual fund. However, Templeton India Income Fund holds a contrarian approach as it expects interest rates to move up. ``The interest rates should remain flat in the next two months with an upward bias. If you look at any of the fundamentals (trade deficit, fiscal deficit), they all point towards rising interest rates. The only thing that has kept interest rates under check is the non-pick up of private sector credit,'' says Nilesh Shah, the fund manager at Templeton.

In line with theexpectation, the average maturity of the portfolio has come down from 13.8 months to 10.6 months in December, 1998. ``We are looking at investing in 3 to 9 months horizon in top credit quality assets. While this will reduce the overall returns, we are churning our portfolio to generate trading returns to compensate for the lower return as we go down on the maturity scale and go up on the rating curve,'' adds Shah. Concurs Richard Overton at ITC-Threadneedle, ``we would like to see lower interest rates but whether it can be achieved is very doubtful. We are expecting slightly higher rates in medium to longer dated bonds.'' However, the fund has increased the average maturity profile of its portfolio. ``We expect the interest income from our underlying investments to mitigate the losses on account of a fall in prices once interest rates move up,'' adds Overton.