The Hindu Business Line : MFs launch floaters hoping interest rates to move up

WITH the fears of interest rates hardening in the short-term,; mutual funds have started introducing new floating rate schemes, which will enable one to invest in floating rate debt instruments, in order to give returns in line with the interest rate movement.

This week alone four mutual funds have announced the launch of such schemes and their IPOs are open for subscription. These funds are Tata Mutual Fund, Reliance Mutual Fund, Principal Mutual Fund and Prudential ICICI Mutual Fund.

"The current yield curve and the overnight index swap (OIS) rates seem to suggest an increase in short-term interest rates," said Mr Amitabh Chaturvedi, Chief Executive Officer, Reliance Mutual Fund.

The country has witnessed a period of sharply declining interest rates since 1999; however from April 2004 onwards, the scenario has seen a major turnaround.

Yields have started hardening and the 10-year gilts is now trading in a sharply higher 6.25-6.5 per cent band. Corporate bond yields too have gone up sharply causing bonds to lose significant values.

Due to this, bond investors have registered prolonged negative returns during this period as the coupon earned is much too less to compensate for the loss in market value of bonds.

"It is keeping this in mind that Principal Mutual Fund has launched the Principal Floating Rate Fund", the fund said in a statement.

The aim is to build a portfolio whose yields adjust to market yields periodically (typically six months) such that interest rates induced changes in the prices of assets are minimised.

Tata Mutual Fund, which has launched floating rate fund for institutional investors, is being targeted towards corporates who park their short-term funds in debt market.

"As the debt market is expected to be volatile in the near to medium term, the plan would be ideal for corporates and high net worth individual investors looking at protecting their investment and optimising returns for short-term period," said Mr Ved Prakash Chaturvedi, Chief Executive Office, Tata Asset Management.

While the minimum investment in Tata Mutual Fund scheme is Rs 1 crore, other mutual funds are targeting retail investors with a minimum investment ranging between Rs 5,000 and Rs 25,000. The minimum investment in Principal and Prudential ICICI Mutual Fund is Rs 5,000 and for Reliance Mutual Fund, it is Rs 25,000.

Mr Amitabh Chaturvedi of Reliance Mutual Fund said short-term investors (who usually invests for few months) could expect decent returns in floating rate fund. Investors could expect capital protection and prospects of higher returns, once short-term rates start moving up.

More Stories on : Mutual Funds | Interest Rates

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
MFs launch floaters hoping interest rates to move up

Bear-run arrested

UltraTech Cemco makes debut on exchanges

Breather for auto stocks

TCS shares listing today

Cement, steel stocks prop up indices

Indiabulls IPO at Rs 16-19; issue opens on Sept 6