CNBC TV18 MF Corner | TBNG | Floating Rate Funds | Navigate current markets | Multicap, ShortTerm Debt Funds

On the Mutual Fund Corner where all your mutual fund-related queries are answered, we have Tarun Birani the founder and CEO of TBNG capital advisers joining in to answer all your mutual fund-related queries.

Are floating rate funds the right choice in the current volatile market environment? Yes, these funds have done well in the past couple of years but is the current market scenario good enough for investors to choose such funds? Tarun highlights his thoughts and analysis on floating rate funds and shares his insights on what options investors could alternatively choose to gain from.

Tarun additionally takes on queries by a retired investor on investments based on his consolidated portfolio. He shares his views on how the investor could best make use of his investments in equities by pointing out laggards in his portfolios and the opportunities in large and midcap funds. He additionally shares his views on global investment opportunities for the investor.

Interviewer: Tushar writes to us by email. He wants to know if the floating rate funds are a good choice for the investment of two years. Tarun this is an interesting question, primarily because of the way the interest rates are poised right now. When the interest rates are low you want perhaps to get the benefits of higher rates sometime later. And when they are higher you want to lock them in so in that situation floating rate investments for the next two years. How do you see them?

Tarun Birani: So very good question. I think the floating rate we all know has been primarily used to take loans as we take home loans are primarily moving into a floating-rate category so as the interest rates keep changing you keep getting the benefit and in India, we have seen the floating rate products in the loan segment have done very well. Now, coming to the floating rate concept in investing. So, what is the floating rate fund? These are, normally in India, created through a combination of fixed income bonds and synthetic instruments such as a swap where they try to hedge the risk against the risk of the interest rate, changes in the interest rates. So there is a bit of complexity in understanding the production in the right context as the return can be a function of the fixed income instrument as well as the capital gain loss arising due to the swap spread at the interest the investor will earn and lose. So no doubt they have performed very well in the last two years because we have seen a trend where the interest rates have been going down. But looking at the environment where we are in right now in the government borrowing program, where RBI is supporting the liquidity as we speak today but going forward as we fast forward the next four to six quarters and the normalcy resumes in the economy, we see the RBI targeting the increased inflation as we see presently, thus looks like that the interest rates can be volatile so again to understand the performance it requires analyzing the impact of these swaps and to my mind, there could be a good chance of a capital loss arising if there is a rise in the interest rate. So in this current environment as we speak I feel for a two year kind of horizon a triple AAA related security many short-duration funds, banking and PSU funds and some corporate bonds are best positioned to benefit from them rather than a floating rate fund. Thank you.

Interviewer: Ganesh writes to us from Gurgaon. He has a lot of investment in the mutual fund. Multiple funds in his portfolio want us to access what he’s doing. Well, he is retired and a lot of these mutual funds that he’s invested in are from July 2019 which is pre-covid levels. And some of them have, he’s listed out this Mirae Asset large-cap, he’s got Kotak Flexi-cap fund, he’s got investments in ICICI pru-balance advantage funds also has Nippon large-cap, L&T infrastructure fund and a Kotak Global emerging front fund. So Tarun has a fair amount of investments but no significant chunk in mid or small caps. There is one Flexi-cap there is a balance advantage but there is a thematic fund and a lot of them are large-cap and some global emerging as well, so is there something that you would recommend to a person who’s retired and has 30% of his investments in MFN Stock?

Tarun Birani: A- I would like to address this question in two parts. First is the suitability part. Since Ganesh mentioned that he is retired and almost 30% is into equity-oriented investment or mutual funds. So I am assuming that 70% of the money is lying in fixed income, fixed deposit, PPF and all those other kinds of instruments. So once that part is clear from a suitability point of view from a risk assessment point of view Mr Ganesh needs to be very clear how much risk he is willing to take. On this 30% of the money if this goes up or down, let’s say coming to the last year example. 30% down is he ready for a paper drawdown kind of loss on the portfolio. That is a very important suitability assessment you need to do for yourself. If he is very clear on that part I think his portfolio is very well poised in terms of the selection of funds in the portfolio. He has a good large-cap fund which is a good 10 year track record, he has a good Flexi cap. The balance advantage strategy again is suitable looking at his retired profile just because he is retired it doesn’t mean he needs to be into fixed income only because the interest rates currently are not conducive enough to earn significant returns or beat inflation. I strongly feel a 30% portfolio into a mutual fund or equity makes a lot of sense. Maybe one of his funds, Reliance Large-cap, may need to be reviewed after some quarters and consolidate into Mirae Large-cap from Nippon. Again infrastructure in this portfolio I feel is a dragger. These infrastructure funds have been mostly wealth destructors and we have observed over the last 10 year period they have not been able to give alpha creation. Instead of that my suggestion would be to switch this to either one of the mid-cap funds because that will help him get a much more diversified portfolio and get better alpha in his portfolio. He has a good mix of an emerging market fund-global fund in the portfolio but my suggestion is looking at the global GDP construct he should be more biased towards North America compared to the emerging market looking at his retired profile. Yes. Thank you so much.

Interviewer: Q- All right.. The next query comes in from Lucknow Rajat Bhardwaj. Rajat writes to us. Unfortunately lost his job in 2020 due to downsizing from the pandemic and was on track to fulfilling a target of 80 lakh rupees in the next 20 years with an investment of up to 11,000 in different schemes since 2015. His investments have stopped since April 2020. He wants to ask how to resume investing in such a way that his money lost to be recovered and invest in his investments again. Is there a way out? It’s an interesting question Tarun because I’m sure a lot of people, unfortunately, lost their jobs during the Pandemic, a lot may, as we are looking at the second wave of this Pandemic as well. How do they manage and navigate through their long-term financial goals despite these hiccups in their career? Maybe via Rajat you can answer a lot of the people who might be facing similar situations.?

Tarun Birani: A-  LSure. So first of all my quick assessment is the investing success is not achieved by investing in the right asset. It is all about investing or avoiding the wrong ones. That is where one can look at. Currently as Rajat mentioned that since he has not been able to invest for some time because of the job loss it doesn’t mean that he should look at risky ventures. Because I have seen many times people look at risky ventures to make up for the loss of what they had due to this time period. They should avoid doing that and my strong suggestion would be once he resumes his work or once he starts getting income as well as savings he should start looking at it in a much more structured way rather than trying to make up the lost time by investing into something risky because it doesn’t make sense. I understand in this situation many people don’t have a right mix of income stream available so it is quite possible they need to chip into savings also in the future so it just doesn’t make sense to move any asset in the risky investment and stay liquid as much as possible. Keep 5-6 months of contingency balance available so that in case if you don’t get a job in the next 5-6 months you have a good contingency fund to take care of. Thank you.