FundsIndia Recommends: Birla Sun Life Floating Rate – Long Term Plan

For Uncertain Times

If you are sitting on the sidelines, spooked by the volatility of both the equity and debt markets, there may yet be opportunities for you to make some money with limited volatility.

Birla Sun Life Floating Rate Fund – Long Term Plan (LTP) is one such fund that can provide you with returns without having to burn your fingers in the current market swing.

With a return of 9.1% in the last 1 year and 9.4% annually in the last 3 years, this fund has been able to ride the market volatility well, thanks to exposure to short-term instruments and high yielding commercial papers, besides holding interest rate swaps, when necessary, to provide some hedge. The fund can also invest in floating rate instruments that are pegged to the MIBOR.

But this is not to say that this fund will not fall in extraordinarily negative conditions such as the July 16^th instance – when even liquid funds’ NAV fell.

Still, exposure to short-term instruments such as certificates of deposits and commercial papers has helped deliver adequately in the current volatility, with limited swings when compared with duration funds.

Suitability

Birla Sun Life Floating Rate LTP is suitable for investors looking to park their money for a period of one year or so in short-term instruments. That it has delivered well even using an SIP suggests that it can also be used for a slightly longer period (2 years) by those looking for tax-efficient alternatives to recurring deposits.

Investors may note that this fund is a short-term fund and is not an alternative for long-term funds such as Birla Sun Life Dynamic Bond Fund.  While the latter may see some volatility over the next few weeks, there may be little need to switch to a short-term fund from an income fund at this point.

Birla Sun life Floating Rate LTP is for investors looking to park fresh money at this juncture and wanting to ride the interest rate uncertainty. While the fund is currently holding short duration instruments, it has in the past (2009, 2010), held portfolios with average maturities of 200-300 days.

But its strategy appears to be closer to the short-end of the curve in more recent years.  Still, investors may treat this fund as being a few notches higher in terms of risk than pure liquid funds or ultra short-term funds with short maturity buckets.

Performance and Portfolio

On a rolling 1-year return taken over the last 3 years, Birla Sun Life Floating Rate LTP managed almost similar returns (8.6%) when compared with other top peers such as L&T Floating Rate. However, the former’s standard deviation is much lower, suggesting that its returns are less volatile.

Substantial exposure to high yielding certificates of deposits and commercial papers has, in recent times, propped up the average yield to maturity at 11.53%. The fund held a good 17% in CBLO as of August suggesting that it was making the best of the high rates in the overnight money market instrument segment. Holding these instruments till maturity provides good accrual. Birla Sun Life Floating Rate LTP has a modified duration of 0.15 years.

However, if one looks at the maturity of individual instruments in the portfolio, the average maturity appears much higher than the modified duration. This suggests that the fund may be exposed to interest rate swaps, which typically help hedge the portfolio from any rate swings.

The fund is managed by Sunaina Da Cunha and Kaustabh Gupta.