AssetPlus NFO Review: DSP Floater Fund

by Maheswaran Hariharan

DSP AMC is launching a NFO, which is set to open for subscription from March 4th, 2021 and closes on March 17th, 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 an aim to provide above average returns by investing primarily in Sovereign Securities(G-Sec and SDL) and Overnight Index Swaps(OIS). The fund is mandated to have at least 65% of its investments in Floating Rate Instruments and the rest 35% in other fixed rate debt instruments. The focus is to generate slightly higher returns than an ultra short/low duration debt fund by having a combination of longer and shorter duration debt instruments with relatively no credit risk.

Fund Manager: Saurabh Bhatia

Benchmark: CRISIL Short Term Gilt Index

Recommended Time Horizon: 6 Months to 4 Years

Minimum Lumpsum Investment Amount: Rs 5,000

Minimum SIP Investment Amount: Rs 500

Fund Management Process:

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

2. Fund will have a two layered strategy while constructing the portfolio

  • The first layer of investments will be in credit risk-free instruments such as Government Securities(G-Sec) and State Development Loans(SDL) having an average duration of 4 years implemented by a roll down strategy
  • The second layer of investments will be in Paid Overnight Index Swaps(OIS), which is used for hedging against interest rate risks in this space

3. Fund aims to protect capital by not venturing into high credit risk instruments

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 manager who has a stellar track record in managing debt mutual funds.
  3. Scope for higher returns when compared to other short term funds.
  4. No exit load.
  5. Relatively very low to no credit risk

Cons:

  1. The liquidity aspect of floating rate instruments is a matter of concern as the Indian Debt Markets does not have major trading volumes
  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 short term debt mutual fund, but at the same time, exposes itself to different kinds of 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.