A floating rate fund primarily invests either in floating rate instruments or in fixed coupon instruments, which are converted to floating rate using swaps/overnight index swaps.OIS) “As and when returns change in our economy, floater funds will more or less adjust their returns in line with the current returns. Going forward we expect that reserve Bank of India To normalize policy rates by hiking Rate of interest Thus many bonds will face market volatility in the near future, which will impact their overall returns. Also, the 10-year-old Indian bond yield It has risen from about 5.8% to 6.4% from its 52-week low on various domestic and global factors. Keeping this in mind to take advantage of rising returns, it is prudent for investors to venture into floater products,” says Rishabh Desai, an AMFI-registered mutual fund distributor based in Mumbai.
Floater Fund has offered 4.83% returns in the last one year which is higher than any other debt fund category except credit risk funds and medium term funds. Even the favourites of the season- banking and PSU funds and corporate bond funds have not outperformed these schemes. Category toppers like ICICI Pru Floating Interest Fund and Kotak Floating Rate have given 6.58% and 5.96% returns in one year.
“There are some reasons why floating rate fund Are in better shape at this point. Short term rates are really low. There is a fear of rising short-term rates due to rising inflation, which could lead to volatility in debt funds. Short term funds may face challenges in a potentially rising rate scenario. However, when and whether the rates will rise is still uncertain, so going for a long-term fund is also not an option. This is where a dynamic fund like a floater fund comes in handy. These funds reduce the risk of your duration play. They are kind of flexible and agile. They work in OIS (Overnight Interest Swaps), so you get slightly better returns than short term funds right now and also reduce your risk of sudden rate hikes,” said Santosh Joseph, Founder, Germinate Wealth Solutions , a wealth management firm says Bengaluru.
The floating rate fund category has seen the highest inflows in the past three months to the debt mutual fund category as investors believe the interest rate cycle is set to reverse. Since most floating rate funds have an average tenure of 0.5-1.5 years, these schemes carry low mark to market risk. However, these plans are not risk free.
“Investors should keep in mind that these funds are not credit risk proof, so it is advisable to choose funds with high credit quality. Also, there are not many genuine floating rate bonds in our country, so fund managers venture into interest rate swaps. Floater funds are also not completely free from interest rate risk. The fund manager needs to execute very accurate and timely interest rate swaps. I advise investors to look for short maturities over a period of one to one and a half years. Stay with funds that can help mitigate the mark to market hit. Investors can allocate some portion and use this range as a strategic call until interest rates in our economy rise. Don’t be stagnant. Investors should match their time horizon with the maturity profile of the fund. Investors who don’t understand the methodology should either seek help or not make strategic bets,” says Rushabh Desai.