Tata Floating Rate Fund: Is This Debt Fund Worthy for Your Portfolio? - Outside View by PersonalFN

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Tata Floating Rate Fund: Is This Debt Fund Worthy for Your Portfolio?
Jun 28, 2021

The Reserve Bank of India (RBI) has reduced the policy rates over the past couple of years to support the economy grappling with slowdown as well as the impact of COVID-19 pandemic. However, it is likely that the interest rate cycle has bottomed out, and we can expect a hike in interest rate towards the end of FY2021-22.

A Floating Rate fund a category of debt mutual funds, has a tendency to do well in a rising interest rate scenario. This category invests in bonds whose coupon rates move in sync with the underlying interest rate without any decline in the price of the bond. Notably, medium to long duration bonds witness a decline in bond price when interest rates rise; on the other hand, floating rate instruments tend to have a lower price fluctuation.

To give investors an opportunity to benefit in a rising interest rate scenario Tata Mutual Fund has launched Tata Floating Rate Fund. It is an open-ended debt scheme investing predominantly in floating rate instruments, including fixed rate instruments converted to floating rate exposures using swaps/derivatives.

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The Fund house in their press release said, "Floating rate fund also gives us flexibility to not only manage interest rate risk through changing allocation to debt instruments (buying different tenure or duration papers), it also provides us another tool in form of swaps to manage duration and at same time choose the optimal mix. We can change the duration and allocation to swaps; for instance, we can choose different tenure of swaps 1year, 2 year 3 year etc and change the outlay to swaps 50% 60% 70%."

Table 1: Details of Tata Floating Rate Fund
Type An open-ended debt scheme investing predominantly in floating rate instruments (including fixed rate instruments converted to floating rate exposures using swaps/ derivatives). Category Debt Scheme - Floater Fund
Investment Objective The objective of the scheme is to generate income through investment primarily in floating rate debt instruments, fixed rate debt instruments swapped for floating rate returns and money market instruments. However, there is no guarantee or assurance that the investment objective of the scheme will be achieved. The scheme doesn't assure or guarantee any returns.
Min. Investment Rs 5000/- and in multiples of Re 1 thereafter. Additional Purchase Rs 1000/- and in multiples of Re 1 thereafter. Face Value Rs 10/- per unit
  • Direct
  • Regular
  • Growth
  • Income Distribution Cum Capital Withdrawal (IDCW)
Entry Load Not Applicable Exit Load Nil
Fund Manager - Mr Akhil Mittal Benchmark Index CRISIL Ultra Short Term Debt Index
Issue Opens: June 21, 2021 Issue Closes: July 5, 2021
(Source: Scheme Information Document)

What will the Investment strategy for Tata Floating Rate Fund be?

Tata Floating Rate Fund will seek to predominantly invest in floating interest rate securities, including fixed interest rate securities swapped for floating rate returns.

The securities will be identified on the basis of various parameters such as, issuer's credit rating history, financial track record of the issuer, corporate governance track record of the issuer, liquidity of the security, maturity of the security, interest rate scenario, etc.

This scheme will maintain a bias towards portfolio quality and duration flexibility to capitalize on market opportunity. The floating rate strategy will benefit from the rising rate due to floating coupon rates that will adjust for higher rates.

The aim of the investment strategy is to allocate the assets of the scheme between various fixed interest rate securities and floating interest rate securities and use derivatives like swaps and Forward Rate Agreements (FRA) effectively with the objective of achieving stable returns in the short as well as long term.

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What is Floating Rate Fund?

Floating Rate instruments are debt securities that pay a floating rate coupon, and the coupon is reset over a pre-determined frequency such as 3 months or 6 months. The coupon rates are based on a benchmark reference rate like MIBOR (Mumbai Inter-Bank Offer Rate).

In terms of Floating Rate, coupon payments are aligned with the changing interest rate and hence, provides opportunity to gain from a rising interest rate scenario. Floating Rate Funds provide relatively stable returns as compared to Duration Funds.

This fund has the flexibility to invest across the credit spectrum and does not have any Macaulay Duration limits.

Under normal circumstances, the asset allocation will be as under:

Table 2: Asset Allocation for Tata Floating Rate Fund
Instruments Indicative Allocations
(% of Net Assets)
Risk Profile
Minimum Maximum
Floating rate securities* (including fixed rate securities converted to floating rate exposures using swaps / derivatives) 65 100 Low to Medium
Fixed rate debt securities, securitized debt, money market instruments 0 35 Low to Medium
Units issued by REITs & InvITs 0 10 Medium to High

*Floating rate securities include Floating rate Money Market Instruments.

(Source: Scheme Information Document)

Who will manage Tata Floating Rate Fund?

Mr Akhil Mittal will be the dedicated fund manager for this scheme.

Mr Akhil Mittal is Fund Manager at Tata Asset Management Ltd. and he has over 20 years of experience in financial services. Prior to this, he was associated with Canara Robecco Asset Management Ltd. As Senior Fund Manager and Principal PNB Asset Management Co Ltd. as Senior Fund Manager reporting to Head - Fixed Income.

Mr Mittal is an MBA and B.com graduate. The other schemes he manages are Tata Treasury Advantage Fund, Tata Dynamic Bond Fund, Tata Income Fund, Tata Young Citizens' Fund (Debt Portfolio), Tata Fixed Maturity Plan Series 53 Scheme A and Scheme B, Tata Fixed Maturity Plan Series 54 Scheme A, Tata Fixed Maturity Plan Series D, E, F,G,H,I,J, Tata Fixed Maturity Plan Series 56 A,B,C,D,F,G,H. Tata Ultra Short Term bond fund and Tata Balanced Advantage Fund (Debt portfolio)

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Fund Outlook - Tata Floating Rate Fund

This scheme aims to invest in floating rate instruments issued by the government or corporate, and fixed rate securities that can convert to floating rate. The endeavour is to retain a short-term duration in the fixed rate portfolio under the current market conditions.

With inflation intensifying, the RBI is unlikely to lower interest rates further; therefore, this scheme will manage proper allocation and duration to balance out any future policy adjustments or rate movement.

This scheme will provide investors competitive accrual yields with lower net duration risk, opportunity to diversify their portfolio of fixed rate securities and reduce the overall portfolio risk.

As the floating interest rates reset in shorter frequency, the interest sensitivity of the floating rate bonds are lower as compared to fixed rate bonds. This scheme has a better return proposition than lower duration fund with lower or similar interest rate risk.

When the interest rates rise, floating rate funds tend to be less volatile than medium to long duration funds. However, the portfolio may still be prone to credit risk depending on the quality of securities it holds.

This scheme is suitable for investors with moderate to high-risk profile, specifically those who are seeking diversification in fixed rate securities and stable portfolio yields in a rising interest rate scenario. You must ensure your suitability to the fund, as the floating rate returns might fluctuate in short to medium term.

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Author: Mitali Dhoke

This article first appeared on PersonalFN here.

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PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.


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