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

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Will the interest rate continue its long-term downward trend or will it see an increase, especially in the short to medium term? The answer to this question may not be easy to find and guessing may not be the right approach. In these times, a debt fund that moves in parallel with the movement of interest rates may prove more effective than others. And that’s exactly what the floating rate fund does. The floating rate fund invests either in floating rate instruments (instruments whose yields vary according to the variation of reference rates) or in fixed coupon instruments which are converted into floating rates by means of swaps.

Tata Mutual Fund has announced the launch of Tata Floating Rate Fund – a floating rate debt program investing primarily in floating rate instruments (including fixed rate instruments converted into floating rate exposures using swaps/derivatives ). The New Funds Offering (NFO) opens on June 21, 2021 and will close 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 floating rate securities issued by companies or the government or to convert fixed income securities to floating via derivatives.

Such a fund offers flexibility and automatically adapts to a changing rate environment. The Floating Rate Fund also gives us the flexibility to not only manage interest rate risk by changing the allocation to debt securities (buying different term or duration papers), but it also provides another tool under the form of swaps to manage the duration and at the same time choose the optimum. to mix together. Overall, one has the flexibility to change the positioning of the fund based on changing attributes or market dynamics.

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

RBI will most likely reduce excess accommodation and deal with liquidity and rate corridor first (difference between repo and reverse repo) and follow with rate movement as needed. RBI will remain on current housing for this fiscal year, and any sort of normalization will only begin after 6-9 months.

Consistent with this view, we expect reverse repos to remain the exploit rate (liquidity will remain systemically excess) and reverse repos to gradually increase and return to the normal band of 25 basis points below the rate. repo rate, compared to the current 65 basis points below the repo rate.

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

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