The declining NAVs across all debt fund categories, including MIPs, have given rise to a new variant of MIP called MIP Floater or Floating Rate Plus funds. Two such funds from Tata and Sahara mutual funds are awaiting SEBI clearance. The basic thing that separates this new variant of MIPs from the exiting ones is their debt universe. Instead of solely investing in fixed income bonds, this new variant of MIP would largely invest in floating rate debt instruments.
Tata MIP Floater will invest at least 80 per cent of its assets in debt instruments, of which 65 per cent will be floating rate instruments. Its equity allocation would be limited to 20 per cent.
Sahara Floating Rate Plus fund will have two plans – Regular Plus Plan and Blended Plus Plan. While the former will be a plain vanilla floating rate fund, the Blended one is the fund we are talking of. This fund will invest at least 85 per cent of its assets in bonds (up to 65 per cent in floating rate bonds) and the remaining (up to 15 per cent) in equities. Here, the universe for equity will be S&P CNX Nifty stocks.
This could be a good move by the two AMCs following the stable returns provided by the floating rate funds in recent volatile times. In the first half of 2004, while income funds' hardly managed to deliver any return, floating rate funds were up 2.2 per cent.
How do these funds produce such returns? Generally, the price of fixed-income instrument changes in accordance to changes in the interest rate - bond price falls, when interest rates rise and vice-versa. But in floating rate instruments, the interest rate is re-adjusted periodically in keeping with the prevailing market interest rates. Thus, in case interest rate rise, the return on floating rate products would automatically go up and vice versa in case interest rates fall.
Since we are currently witnessing a rise in bond yields due to the expected rise in interest rate, floating rate instruments are the ideal parkway. And for MIP investors, this could be a big plus as the return from debt component will be protected here. Thus sooner these funds are launched the better it would be for the investors as well as the fund house.
Recently, Templeton Mutual Fund has also introduced a new plan under its FT India Life Stage Fund of Fund scheme on similar lines. It's called 50s Plus Floating Rate Plan. This new plan will invest 20 per cent in two equity funds - Franklin India Bluechip and Templeton India Growth, and the remaining 80 per cent in Templeton India Floating Rate Income Fund - Long-term Plan.