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B. Venkatesh

THE holding period returns in Templeton India Floating Rate Fund (Long-Term Plan) since its launch in February 2002 is 7.15 per cent. Those who prefer stable market returns can take small exposure in the fund.

Investors may consider the following factors before buying units: The fund's objective is to primarily invest in floating-rate bonds. Such bonds carry low market risk because interest rates are reset periodically. For instance, a company may issue a floating rate bond that offers 2 per cent more than Mumbai Inter-Bank Offer Rate (MIBOR) with interest reset every half-year.

This means that interest rate for July-December 2003 will be based on the MIBOR as on July 1, 2003. Similarly, the interest rate for January-June 2004 will be based on MIBOR as on January 1, 2004. Since these bonds carry the prevailing market rate, their price risk is lower.

The price risk refers to the likelihood of the bonds falling in value to reflect an increase in market interest rate. The low price risk is reflected in the low fluctuation in the fund's returns since last February.

The fund's ability to contain the price risk is, of course, dependent on the supply of floating rate bonds in the market. Not many companies may be willing to offer such bonds now, for the rise in interest rates will push up their interest costs. At present, a third of the fund's portfolio contains MIBOR-linked instruments, with the rest in corporate bonds and money market instruments.

Investors should note that low price risk also means lower returns. Since interest rates on floating rate bonds reflect the market rate, prices of these bonds do not move up as in the case of fixed-rate bonds. Hence, scope for capital appreciation is lower. Then, there is the reinvestment risk. This refers to the risk that the fund may earn lower returns because of fall in interest rates in the future. For instance, if the MIBOR falls during the reset period, the interest rate earned on the floating rate bond will be lower.

Besides, the coupon payments received on the fixed-rate bonds in the fund's portfolio may have to be reinvested at lower rates. Both these factors will lower the returns for the unit-holders.

However, interest rates are unlikely to fall sharply from the current levels. The fund's reinvestment risk is, hence, not very high at present.

An important factor that governs the risk-return trade-off is the fund's composition of floating and fixed-rate bonds; a higher composition of floating-rate bonds would be beneficial to the unit-holders.

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