With interest prices most likely to move up, intelligent investors are investing in floater funds of mutual funds. The assets beneath management (AUM) in this category have almost doubled from Rs 32,481 crore in May 2020 to Rs 62,638 crore in January 2021. In reality, when investors pulled out Rs 33,408 crore from debt mutual funds in January, floater funds reported net inflows of Rs 3,128 crore.
Floater funds invest at least 65% of their total assets in floating-price instruments. These funds advantage from a increasing interest price situation as the coupons on such instruments are adjusted upwards when interest prices move north. Given the dearth of floating price instruments in the Indian debt markets, these funds commonly invest in fixed-coupon bonds and use derivative instruments such as interest price swaps to convert the fixed-price receivables into floating-price.
Dhaval Kapadia, director, Investment Advisory, Morningstar Investment Adviser (India), says in the current previous, interest prices have moved decrease across the yield curve to multi-year lows following sharp price cuts and other measures by Reserve Bank of India. “Concerns over a roll-back of these support measures leading to a possible upward move in interest rates have increased the attractiveness of the floater funds category. As a result, this category has seen increased traction over the past 6-8 months. The recent Budget announcement of higher government borrowing coupled with rising interest rates across the globe has further exacerbated concerns over a pick-up in interest rates. Hence, the floater funds category may further attract investor interest,” he says.
Returns from funds
Floating price funds invest in AAA-rated instruments. On typical, the category has provided 7.8% returns for one year, 8.48% for two years and 8.19% for 3 years. In the present situation, these funds can produce excellent returns in the close to term.
Harshad Chetanwala, co-founder, MyWealthGrowth, says traditionally, anytime interest price rises, return on floater funds also goes up as the funds predominantly invest in floating price instruments. “As the interest rates are expected to increase gradually in coming quarters, the benefit of increasing interest rate will also pass on to the floater funds,” he says.
What to look out for
As floater funds are a new category—there are eight funds at present— and the AUM in this category is largely dominated by corporates and HNIs, retail investors have to realize the default or credit danger.
Brijesh Damodaran, managing companion, BellWether Advisors LLP, says when investing in debt schemes, be it liquid, floater, duration or accrual funds, one have to look at the portfolio constitution and the danger related in it. “With increasing yields, the returns on the shorter end of the curve are going to be low,” he says.
Floater funds are very sensitive towards interest price and therefore the returns will fluctuate as and when interest price alterations.
Chetanwala says the return from floater funds are anticipated to go along with the interest price. “Along with that investors should look at the portfolio of the fund and check the quality of holdings before investing. Like every debt fund except gilt funds, even floater funds can invest in debt instruments of private institutions along with the government. Hence floater funds do carry default or credit risk,” he notes.