Tata Mutual Fund launches Tata Floating Rate Fund – Know how it is different from other debt funds

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June 29, 2021 7:22 PM

Floating Rate Fund in the debt category suits the upcoming rate cycle and would provide a good alternative to other debt funds.

best debt fund scheme when rates riseThe floating rate fund invests in either floating rate instruments or in fixed coupon instruments which are converted to floating rates.

Will the interest rate continue its long term trend of moving lower or will it see a rise especially in the short to medium term? The answer to this may not be an easy one to crack and taking a guess may not be the right approach. In these times, a debt fund that moves in tandem with interest rate movement may prove to be more effective than others. And, the Floating rate fund does exactly that. The floating rate fund invests in either floating rate instruments (instruments whose yields change with change in benchmark rates) or in fixed coupon instruments which are converted to floating rates by using swaps.

Tata Mutual Fund announced the launch of Tata Floating Rate Fund – an open-ended Debt Scheme predominantly investing in floating rate instruments (including fixed-rate instruments converted to floating rate exposures using swaps/derivatives). The New Fund Offer (NFO) opens on June 21, 2021, and will close on July 5, 2021.

The Fund will endeavour to generate relatively stable returns through a portfolio comprising substantially of floating rate debt, fixed-rate debt instruments swapped for floating rate returns and money market instruments. The fund aims to invest a minimum of 65% of its corpus in floating rate securities issued by corporates or the government or convert fixed interest securities to floating via derivatives.

Such a fund provides flexibility and self-adjusting to a changing rate environment. Floating rate fund also gives us the flexibility to not only manage interest rate risk through changing allocation to debt instruments (buying different tenure or duration papers), it also provides another tool in the form of swaps to manage duration and at same time choose the optimal mix. Overall, one has the flexibility to move the fund positioning with changing attributes or dynamics of the market.

Akhil Mittal, Senior Fund Manager at Tata Asset Management explains the rationale behind launching Tata Floating Rate Fund, “If we look at overall interest rate cycle, with inflation remaining high, we believe the easing cycle is behind us and what follows is normalization of policy.

RBI will most likely reduce the excess accommodation and would address liquidity and rate corridor (difference in reverse repo and repo) first and follow up with rate movement as and when required. RBI will stay put on current accommodation for this FY, and any sort of normalization will start only after 6-9 months.

In line with this view, we expect reverse repo to remain the operating rate (liquidity to remain systemically surplus) and reverse repo to gradually rise and come back to normal band of 25bps below repo rate from current 65 bps below repo rate.

With this view in mind, it is imperative that we manage our positioning and duration in such a way that any policy change or rate movement has a lesser impact on our investments and we move with broader directional change in the market. Hence, we have launched our new Fund, Tata Floating Rate Fund in the debt category to suit the upcoming rate cycle and would provide a good alternative to other debt funds or products”.

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