Fund managers of High Interest Fund, a debt-oriented scheme, had then felt that interest rates would harden and decided to keep 73 per cent of their portfolio in cash. The corpus of the scheme was about Rs 15 crore.

By keeping money in cash or in short-term dated securities the fund has been able to put money in the call market as and when the interest rates shoot up. This has given it the much needed flexibility in a highly volatile interest rate regime.

On January 16, when the interest rates had shot up, the fund had benefited by placing money in the call money market and made around Rs 10 crore in the bargain.

As of now the fund managers have shifted 54.6 per cent of their allocation to short-term securities with a maturity of less than three months, 15.4 per cent in cash and current assets,3.7 per cent in three months to a year, 4.2 per cent in one to two years and 22.1 per cent in more than two years of maturity.

"Interest rates are likely to harden further. And keeping this in mind we have taken money out of the call market at present as the call rates have gone down and put the same in short-term securities with maturity within three months," said ITC Threadneedle AMC managing director Richard Overton.

Thus, in order to achieve a higher return when interest rates harden, the portfolio is being kept in short-term securities. As a result the returns from High Interest Fund will be lower in the short term but will improve as and when interest rates harden with allocations readjusted.

The interest rates have already started to climb up. For example, the interest rate for AAA-rated, 5-year maturity paper has already moved up.Also, a number of corporates are slated to shift to the domestic markets for their borrowing programme in the wake of Moody's downgrade of India, which will lead to anincrease in the cost of borrowing overseas. "The strategy of keeping the corpus in cash has helped us achieve competitive returns with a safer portfolio," said Overton. The annualised return since inception works out to be 14.40 per cent, over the past 12 months at 13.3 per cent and for the past six months at 7.75 per cent.

"By being in cash and money market instruments we are in a position to progressively invest at higher rates. For example, if we had invested earlier in long-dated securities the return would have been much lower than what we have managed to obtain by being in cash," said the fund manager of High Interest Fund, Sridhar Narayan.

"We expect the interest rates to move up further in September from these levels. This is because the government which last year had completed 90 per cent of its borrowing by September, has only borrowed 50 per cent of its requirements. Also, the corporates start their borrowing programme in September and at that time different sources would be competing leadingto a further increase in interest rates," said Narayan.