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Tata Mutual Fund launches Tata Floating Rate Fund ~ NFO opens on 21st June 2021 and closes on 5th July 2021~

Mumbai, June 21, 2021: 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.

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 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 lesser impact on our investments and we move with broader directional change in 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 / products”.

Explaining Floating Rate Fund

Floating rate fund means that the fund's broader direction moves in tandem with interest rate movement.

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 rate by using swaps.

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 we buy 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 we will have higher coupon from our holding. Unlike a fixed coupon bond, where the coupon will not change with change in repo or reverse repo change.

In case of fixed income instruments where swaps are used to convert them into floating, the swaps generally move in similar direction as broad interest rate movement. E.g. we buy a 3 year NCD with 5% fixed coupon. We then pay fixed swap against it (let us assume 3 year swap ). If the repo rate changes, the swap rate will also go up. So, we will make profit on the swap paid position, which would offset the loss that we incur on our fixed coupon bond. Hence rate move will have lesser impact as compared to a case where we hold the fixed coupon bond and rate goes up.

In both the above cases, the direction of fund is similar to direction of rate movement. Given our view on interest rates, this fund provides flexibility and self-adjusting to changing rate environment. 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 (e.g. we can choose different tenure of swaps 1year, 2 year 3 year etc and change the outlay to swaps 50% 60% 70%).

Overall, one has the flexibility move the fund positioning with changing attributes or dynamics of the market.

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