Canara Robeco Floating Rate fund: Invest:: Business Line

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Reserve Bank of India (RBI) has for the 11th time in 17 months hiked the repo rate by 50 basis points which has surprised market participants and investors. With inflation not expected to moderate anytime soon, RBI is trying to go hawkish in terms of interest rates. This may lead to sustenance of high interest rates for some more time.

Investors can therefore focus on ultra-short term and short-term funds. Canara Robeco Floating Rate Fund (CanRobeco Floater) is one such option which looks attractive for a one year investment horizon. Investors may have to revisit this investment beyond one year as clarity emerges on the long-term interest rates .

For a one year period, the fund delivered returns of 8.4 per cent as compared with the 7.25 per cent return from banks a year ago. . The fund also outperformed its benchmark Crisil Liquid Index .

Suitability: CanRobeco Floater focuses on investments with an average duration (measure of risk) of less than a year thereby protecting returns from high interest rate volatility. The catch, however, is the lower yields on these instruments. Therefore, these funds make for good investments options in scenarios such as the current one where interest rate at the shorter end of maturity are high. This fund is better suited than fixed deposits for investors in higher tax brackets. Investments of less than one year would lead to sub-optimal returns given the effect of short-term capital gains tax.

Portfolio and performance: The fund has been a consistent performer across market cycles. The fund delivered an annualised 7.1 per cent and 7.53 per cent return over three year and five year periods respectively.

The ultra-short term and floating rate funds as a category have delivered average returns of 6.46 per cent and 7.04 per cent respectively during the same time periods.

On rolling return basis, the fund has outperformed its benchmark 100 per cent of the time since July 2007.

However, the risk profile of the portfolio is slightly higher as the fund invests a chunk of its holdings in commercial paper. The fund also suffers from concentration risk with a portfolio of 5-7 securities.

CanRobeco Floater seems to be actively churning its portfolio given that the average portfolio for some time has been around three months. As of June 2011, the average portfolio was 2.6 months with yield-to-maturity of 9.53 per cent. This is indicative of the attractiveness of the rates in the short-term.

The fund is predominantly invested in money-market instruments (92 per cent) with close to 62 per cent in investment grade commercial papers.

The three month certificate of deposits and commercial paper rates have moderated since March 2011, as in the first half of the year, the borrowing activity is low. However, with the current policy tightening spree and higher demand for funds during the second half, the rates may once again shoot up.

The current rates on 3-month CP and CD are 9.45 per cent (annualised) and 9.04 per cent respectively