A Mutual Fund is a trust that pools together the savings of a number of investors who share a common financial goal. The fund manager invests this pool of money in securities, ranging from shares, debentures to money market instruments or in a mixture of equity and debt, depending upon the objective of the scheme. Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost.

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Types of Funds

• Diversified Equity Mutual Fund Scheme

• Spectral Equity Mutual Fund Scheme

• Index Funds

• Monthly Income Plan Scheme

• Equity Linked Tax Saving Schemes (ELSS)

• Income schemes

• Floating-Rate Debt Fund

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Your guide to Turnover Ratio in funds:

Turnover ratio is concluded by taking into account the lower of the total sales and dividing this particular figure by the average month-end net assets. To put it briefly, the minimum number of stocks that are bought or sold and is divided by the assets that are under management.

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Significance of turnover ratio:

In comparison to a long-term buy and hold manager, who typically is responsible for running the portfolio with a lower turnover ratio, A turnover that is higher is often an indication of a higher chum in the portfolio. A significantly high turnover could also indicate an inconsistency in the process, which could affect the overall returns of the fund over a long period of time.

A manager’s style of investment can be attributed to the turnover ratio. For instance, a manager who engages in a  long-term buys and holds typically experiences a turnover ratio on his fund that is lower as compared to a manager who invests for the short term.

Usually, a handful of fund houses have a tendency to report two distinct turnover ratios, and overall turnover in which the cash component is included, and a second ratio which is the turnover for equity.

These two figures can end up being substantially different, thus making it of great importance for investors to look at the right figures while attempting to make a comparison.

We believe that it is significantly crucial to look at the turnover ratio of the fund in addition to other factors. Simply observing the turnover ratio as a lone factor may end up not being the right approach, when it comes to making sound investment decisions.

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A checklist to ensure a successful investment into Floating Rate Fund:

Floating rate funds can be classified as debt funds that at any given time, must invest a minimum figure of 65% of their portfolio in instruments pertaining to floating rate.

One of those well-known instruments being Floating Rate Bonds. Given the limited issuances of floating-rate instruments in the domestic debt market, elements like mutual funds make use of derivative instruments such as interest rate swaps to convert fixed coupon instruments to floating rates by using Interest Rate Swaps like Overnight Index Swap.

Floating Rate Bond, or FRB, what is it?

We’re aware in the case of a regular bond, that for its entire tenure, the coupon rate is fixed. This however is not true in the case of an FRB.

As the term “floating” suggests, the rate of interest is variable and is linked to an external benchmark. The latter could be the Mumbai Interbank Offer Rate (MIBOR), the Reserve Bank of India’s (RBI’s) repo rate, or the 3-month treasury bill yield.

Accordingly, the interest rate of the bonds is subject to moving up or down periodically.

If we look at the case of RBI’s Floating Rate Savings Bonds 2020 issued by the Government of India, the bonds were available for subscription on July 1, 2020, while having their interest rate linked to the National Savings Certificate (NSC), which at

the time was benchmarked at 0.35% above the prevailing NSC rate. It is interesting to note that the interest rate, which was initially fixed at 7.15%, would be reviewed every six months. The rate remained unchanged from January 1 to June 30, 2021, and is expected to continue this trend from July 1, 2021, to December 31, 2021.