Tata Mutual Fund Launches Tata Floating Rate Fund – Know How It’s Different From Other Debt Funds
Will the interest rate continue its long-term downward trend or will it increase especially in the short to medium term? The answer to this question might not be easy to find and guessing might not be the right approach. In these times, a debt fund that moves in parallel with the movement of interest rates may prove to be more effective than others. And that’s exactly what the variable rate fund does. The variable rate fund invests either in variable rate instruments (instruments whose returns change with the change of the reference rates) or in fixed coupon instruments which are converted into variable rates using swaps.
Tata Mutual Fund announced the launch of Tata Floating Rate Fund – an open-ended debt program investing primarily in floating rate instruments (including fixed rate instruments converted into floating rate exposures using swaps / derivatives ). The New Fund Offer (NFO) opens on June 21, 2021 and closes on July 5, 2021.
The Fund will seek to generate relatively stable returns through a portfolio consisting primarily of floating rate debt securities, fixed rate debt securities exchanged for floating rate returns and money market instruments. The fund aims to invest a minimum of 65% of its corpus in variable rate securities issued by companies or the government or to convert fixed interest securities into floating securities via derivatives.
Such a fund offers flexibility and self-adjustment to a changing rate environment. The variable rate fund also gives us the possibility not only to manage the interest rate risk by modifying the allocation to debt instruments (purchase of securities of different duration or duration), it also provides another tool under the form of swaps to manage the duration and at the same time choose the best mix. Overall, we have the flexibility to shift the positioning of the fund with changing attributes or market dynamics.
Akhil Mittal, Senior Fund Manager at Tata Asset Management, explains the rationale for launching the Tata Floating Rate Fund: “If we look at the overall interest rate cycle, with inflation still high, we think the cycle is high. easing is behind us and what follows is the standardization of policy. .
The RBI will most likely reduce excess housing and deal with the liquidity and rate corridor (the difference between reverse repurchase agreements and reverse repurchase agreements) first and monitor rate movements as needed. RBI will remain on the current homes for this fiscal year, and any sort of normalization will not begin until after 6-9 months.
Consistent with this view, we would expect the reverse repo to remain the operating rate (liquidity remains systemic excess) and the reverse repo to gradually increase and return to a normal band of 25bp below the repo rate, versus 65bp currently below the repo rate.
With this in mind, it is imperative that we manage our positioning and our duration in such a way that any policy change or rate movement has a lesser impact on our investments and that we evolve with a broader change of direction in the market. Therefore, we launched our new fund, the Tata Floating Rate Fund in the debt category to adapt to the coming rate cycle and would be a good alternative to other debt funds or products ”.