Prudential ICICI AMC comes out with Floating Rate Plan

Our Markets Bureau
26 March 2003

The fund has two options, Cumulative and Dividend Reinvestment. The dividend frequency has been set at a fortnightly basis, which works out better from the tax angle, as the dividends are tax-free in the hands of the investor.

Investors perceiving uncertainties in the debt markets and wanting to negate the volatilities (like the impact of the Iraq war) can look forward to the option of parking their funds in PruICICI Floating Rate Plan. Religious and charitable trusts are eligible to invest in the plan under the provisions of 11(5) (xii) of the Income Tax Act, 1961.

Floating rate instruments, though in a nascent stage in India, are gaining ground and the trend indicates that there is an appetite for such products. In a floating rate instrument the interest rate is periodically reset based on a pre-specified benchmark rate, at pre-specified intervals.

The reset intervals can be six months, three months, one month and even daily depending on the duration of the floater. The spreads will be higher for the longer-term interest rate, allowing the investor to earn a higher carry. Floaters can be reset to a variety of rates and benchmarks. Due to the frequency of the reset, floaters actually behave like money-market instruments and have a low duration.

The initial public offering (IPO) will be open for a day, on 28 March 2003.

Says PIAMC managing director Shailendra Bhandari: “Floating rate instruments have dominated world markets for years, and are increasingly becoming important in India. Our fund, which will invest primarily in such instruments, will enable investors to avoid the potential capital losses, which might otherwise have arisen if the investments were in fixed rate instruments. While we are still positive on our outlook for soft interests in the medium term, this fund will enable investors to avoid losses if interest rates start to trend upwards in the longer term.”