According to the last few Monetary Policy Committee (MPC) meetings, it seems unlikely that RBI will lower the interest rate any further. The interest rate cycle has declined to a multi-year low; however, there is an expectation of a gradual hike in the interest rate cycle in the medium term.

This has resulted in a traction towards the floating rate bonds, a category of debt mutual funds. Hence, investing in floating rate debt instruments could be advantageous to your portfolio. Moreover, you could benefit from the floating rate schemes, as they convert the fixed rate debt instruments to floating rate bonds, wherein the yields will rise in tandem with the rising interest rates.

Floating rate funds aim to capture opportunities in the debt markets and investors looking to park their money in short-term funds and mitigate the growing interest rate risk may consider them.

Axis Mutual Fund, one of the fastest-growing fund houses has launched Axis Floater Fund aiming to target short-term investors seeking to secure returns from interest-rate-driven volatilities.

On the launch of this fund, Mr Chandresh Nigam MD and CEO at Axis Asset Management Company Ltd. said, “The economic fundamentals are improving gradually and returning to normalcy. These are early signs of a pickup in demand and we believe we are at the cusp of a new growth cycle. The country is also likely to be at the bottom of the interest rate cycle and we expect to see a gradual rate hike cycle in the medium term. With the launch of this fund, we believe that we will provide an efficient solution for short-term investors looking to navigate a possible rising rate environment.”

Table 1: Details of Axis Floater Fund

Type An open-ended debt scheme predominantly investing in floating rate instruments. Category Debt Scheme – Floater Fund
Investment Objective To generate regular income through investment in a portfolio comprising predominantly of floating rate instruments and fixed rate instruments swapped for floating rate returns. The Scheme may also invest a portion of its net assets in fixed rate debt and money market instruments. However, there can be no assurance or guarantee that the investment objective of the scheme would be achieved.
Min. Investment Rs 5000/- and in multiples of Re 1 thereafter. Additional Purchase Rs 1000/- and in multiples of Re 1 thereafter. Face Value Rs 10/- per unit
  • Direct
  • Regular
  • Growth
  • Income Distribution Cum Capital Withdrawal (IDCW)
Entry Load Not Applicable Exit Load Nil
Fund Manager Mr Aditya Pagaria Benchmark Index NIFTY Ultra Short Duration Debt Index
Issue Opens: July 12, 2021 Issue Closes: July 26, 2021

(Source: Scheme Information Document)  

What will the Investment strategy for Axis Floater Fund be?

Axis Floater Fund will predominantly invest in floating rate instruments including fixed rate instruments converted to floating rate exposures using swaps/derivatives.

This scheme will aim to generate regular income and reduce interest rate risk through investments in a portfolio comprising predominantly of floating rate debt / money market instruments (including fixed rate instruments converted to floating rate exposures using swaps/ derivatives).

The investment strategy will focus on macro-economic research, credit risk, and liquidity management. Besides guidance from the ratings by rating agencies, the scheme will also apply its credit evaluation process as a part of the credit risk assessment.

The fund manager will actively manage this scheme. The investment decision will depend on his view of the prevailing interest rate scenario, maturity & liquidity of the instrument, quality of management, and any other related factors.

What are floating rate instruments?

Floating-rate bonds (FRBs) are variable rate debt instruments linked to market yields. It offers a coupon tied to a benchmark rate like the repo or the 3-month T-Bill.

The coupon resets periodically to factor in changes to the interest rate based on the movement in interest rates.

The price of typical fixed rate bonds have an inverse relationship with changes in interest rates-as interest rates rise, prices of bonds fall, and vice versa. Since floater coupons adjust periodically, the prices of these bonds do not follow the same price/yield relationship.

This scheme may also convert fixed rate instruments to floating rate instruments using swaps/derivatives. A swap is a derivative contract where the holder of a fixed rate bond can convert a fixed rate exposure into a market-linked floating rate exposure; thereby reducing any interest rate risk associated with the fixed rate instrument.

Under normal circumstances, the asset allocation will be as under:

Table 2: Asset Allocation of Axis Floater Fund

Instruments Indicative Allocation (% of net assets) Risk Profile
Minimum Maximum High/Medium/Low
Floating Rate Debt Instruments (including Fixed Rate Debt Instruments swapped for floating rate returns) 65 100 Low to Medium
Debt and Money Market Instruments 0 35 Low to Medium
Units issued by REITs & InvITs 0 10 Medium to High

(Source: Scheme Information Document)  

Who will manage Axis Floater Fund?

Mr Aditya Pagaria will be the dedicated fund manager for this scheme.

Mr Aditya Pagaria is Fund Manager – Fixed Income at Axis Asset Management Company Ltd. he holds an experience of over 10 years in financial services. Prior to this, he was associated with ICICI Prudential Asset Management Company Ltd. as Fund Manager – Fixed Income and in Operations at the beginning of his career.

Mr Aditya’s qualification includes Bachelor in Management Studies and Post Graduate Diploma in Business Management. The other schemes he manages are Axis Treasury Advantage Fund, Axis Liquid Fund, Axis Equity Advantage Fund – Series 1 and Series 2, Axis Banking & PSU Debt Fund , Axis Ultra Short Term Fund, Axis Overnight Fund, Axis Money Market Fund and Axis Floater Fund.

Fund Outlook – Axis Floater Fund

Axis Floater Fund will primarily invest in floating rate instruments including fixed rate instruments converted to floating rate exposures using swaps/derivatives. The fund endeavours to hold 80% of its assets in AAA/A1+ rated instruments; along with 20% allocation in AA rated issuers.

The scheme aims to invest in floating rate debt instruments and would target to hold a net portfolio average maturity between 6 to 18 months. With interest rates at a multi-year low, complemented with rising inflation, the RBI is left with no scope to decline the policy rates further. Thus, the scheme will aim to benefit from active investment in floating rate debt instruments that could help balance out the policy adjustments and interest rate movement in the future.

This scheme aims to mitigate the interest rate risk with floating rate strategies and invest in bonds where the coupon is linked directly to the market movement. This strategy offers investors with better risk-reward opportunities and lower interest rate risk as compared to other existing traditional alternatives in the short-term market space.

In a rising interest rate environment, floating rate funds with lower maturity portfolio tend to be less volatile than medium to long duration funds. As the interest rate sensitivity of floating rate bonds is lower than the fixed rates bonds, this scheme is not immune to credit risk. The success of the scheme depends on the quality of debt securities the fund manager holds at the time of constructing the portfolio.

Axis Floater Fund will offer in line with the prevailing interest rates. Thus, this fund is best suitable for investors looking to hedge interest rate risks in a rising rate environment or those looking to limit the interest rate risks in their debt portfolio. Ensure you have a moderate to high-risk profile. Suitability to the fund will be based on your investment horizon and investment objectives.

This article first appeared on PersonalFN here

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