NFO: Tata Floating Rate Fund

By Morningstar |  21-06-21 | 

Tata Mutual Fund launched 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.

In case of floating rate instruments, as the broader interest rates change, the benchmark also moves, resulting in similar direction movement. E.g. Let us say the fund buys a paper with coupon of MIBOR + 200 bps, we know that MIBOR tracks very closely to operating rate (repo or reverse repo). Now if repo or reverse repo is hiked by 25 bps, MIBOR would also go up by 25 bps. That means the fund will have a higher coupon from its holding. Unlike a fixed coupon bond, where the coupon will not change with change in repo or reverse repo change.

"Given our view on interest rates, this fund provides flexibility and self-adjusting to 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 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 (e.g. we can choose a different tenure of swaps 1year, 2 year 3 year, etc and change the outlay to swaps 50% 60% 70%)," states the release.

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