AssetPlus NFO Update: IDFC Floating Rate Fund

by Maheswaran Hariharan

IDFC AMC is launching a NFO, which is set to open for subscription from Feb 10th, 2021 and closes on Feb 16th, 2021.

Investment Objective: To generate slightly higher returns in the fixed income category in the short term, suitable for investors having a moderate risk appetite who are comfortable with mild volatility.

Investment Strategy: The fund has a flexible allocation to fixed income instruments with no specific restrictions to credit quality and duration. The fund is mandated to have at least 65% of its investments in Floating Rate Instruments. Currently, the fund has positioned a minimum of 70% of their portfolio in AAA/A1+ Equivalent/Sovereign/Quasi Sovereign. The focus is to generate slightly higher returns than an ultra short/low duration debt fund by giving higher exposure to credit risk as a whole.

Fund Manager: Anurag Mittal and Arvind Subramanian

Benchmark: Nifty Low Duration Debt Index

Recommended Time Horizon: 6 Months to 1 Year

Minimum Lumpsum Investment Amount: Rs 5,000

Minimum SIP Investment Amount: Rs 1,000

Fund Management Process:

  1. Selection criteria is purely from the universe of fixed income instruments.

2. Fund will have a three layered strategy while investing with prominence given to Floating Rate Instruments(65%-100%), followed by Debt and Money Market Instruments (0%-35%) and if required, there will be investments in units issued by REITs and InvITs(0%-10%).

3. Initially, the fund will position itself by taking majority of its investments into areas like AAA or A1+, which are of high credit quality but the philosophy of the fund is to have no cap or floor for its overall structure as it will depend purely on market opportunities.

Based on our analysis, we have observed the following pros and cons

Pros:

  1. Actively managed portfolio with a clear fund philosophy.
  2. Experienced fund managers who have stellar track record in managing debt mutual funds.
  3. Scope for higher returns when compared to other short term funds.
  4. No exit load.

Cons:

  1. Credit Risk is significantly higher when compared to other short term funds.
  2. The concept of Floating Rate involves complex mechanisms like Interest rate swaps which makes it uncertain to choose for investors with limited knowledge.

Debt Mutual Funds as a product is generally used for wealth preservation with an expectation of having slightly better returns than savings bank/fixed deposit. Floating rate as a category is a step above, having the potential to generate higher returns than a traditional debt mutual fund, but at the same time, exposes itself to higher risk. If an investor is ready to digest short term volatility for higher returns, then Floating Rate funds should be definitely considered.

It is good to diversify by allocating some amount of portfolio into this fund but investors should make sure there is substantial investments in safer categories of fixed income like Low Duration/Ultra Short.  It is of utmost importance that the fund should be discussed with your financial advisor and then ascertain whether it is suitable to invest. Always read the scheme documents fully before investing.