Floater Funds: The attractiveness of investors in mutual fund floater funds has increased recently. If you look at the data of the Association of Mutual Funds of India (AMFI), in January, where investors pulled out Rs 33,408 crore from debt mutual funds, the net inflow of floater funds has been Rs 3,128 crore. Investors also sold inequities in January. In fact, with the possibility of further interest rates rising, smart investors are investing in floater funds of mutual funds. The asset under management (AUM) in this category has increased from about Rs 32,481 crore in May 2020 to Rs 62,638 crore in January 2021.
What are floater funds?
Floater funds invest at least 65 per cent of their total assets in floating rate instruments. These funds benefit in the rising interest rate scenario. Because when interest rates rise, coupons on such instruments are adjusted upward. Given the lack of floating-rate instruments in the Indian debt market, these funds typically invest in fixed coupon bonds. And use derivative instruments such as interest rate swaps to convert fixed-rate receivables to floating-rates.
Why returns may increase
Morningstar Investment Advisor (India), Investment Advisory, Dhawal Kapadia says that in recent times, interest rates have been at several-year lows after continuous rate cuts and other measures by the Reserve Bank of India. In the coming days, there is a possibility of a cut in such support given by the RBI. Due to this, one can see an increase in interest rates. This concern has increased the attraction of the floater fund category. The result is that this category has increased in the last 6-8 months. Recent budget announcements regarding the government borrowing program have further increased concerns about interest rate hikes.
How much is the returns from the fund
Floating rate funds invest in AAA-rated instruments. The average one-year return in this category has been 7.8 per cent. The average return for two years has been 8.48 percent and the average return for 3 years has been 8.19 percent. Talking about the present time, these funds can give better returns in near term.
Harshad Chetanwala, the co-founder of MyWealthGrowth, says that whenever interest rates rise traditionally, the returns of floater funds also increase. Because these funds mainly invest in floating-rate instruments. He says that interest rates are expected to increase gradually in the coming quarters, so the floater fund will also get the benefit of increasing the interest rate.
Fund and 1 to 3 Year Return
Fund 1 year 2 years 3 years Fund size (jan 2021, Cr Rs)
Aditya BSL FRF 6.98% 8.00% 8.04% 9684
Franklin India Floating Rate 5.60% 6.95% 7.11% 236
HDFC Floating Rate Date 8.25% 8.51% 8.26% 16001
ICICI Pru Floating Interest 9.04% 0.40% 8.78% 13323
Kotak Floating Rate 8.49% – – 4721
Nippon India FRF 8.94% 9.55% 8.75% 16057
UTI Floater 7.29% 8.45% – 2538
(source: morningstar India)
Things to keep in mind before investing
Floater funds are a new category and currently have 8 funds. Most corporates and HNIs are dominated in this category, so retail investors should understand the default or credit risk.
Brijesh Damodaran, the managing partner of BellWether Advisors LLP, says that when investing in debt schemes, be it liquid, floater or duration funds, an investor should look at the risks involved. Floater funds are sensitive to interest rates and so when the interest rate changes, the returns fluctuate.
Chetanwala says that the returns from floater funds are expected to grow further. But before investing, investors should look at the fund’s portfolio and see the quality of that fund. Like every debt fund except gilt funds, even floater funds can invest in debt instruments of private institutions with the government. So floater funds take default or credit risk.
