As consumer inflation has already hit its 17-month high, bond yields continue to march forward — in all likelihood — it won’t be long before the central bank raises key interest rates. In this backdrop, investors are supposed to relook at their portfolio, particularly allocation to debt funds.
We explore if this is the right time to take a serious look at floater funds since they are supposed to be well-suited during volatility in debt markets.
What are the floater funds?
Floater funds are the debt mutual funds which invest a minimum of 65 per cent in floating rate securities issued either by the government or by corporates. They can also convert fixed interest securities into a floating rate via derivatives.
The coupon rate tends to change to incorporate changes in interest rates in either direction.
These funds are likely to rise ahead of rate hikes by the RBI. These funds offer a coupon tied to a benchmark rate such as repo rate. They are considered good in a rising interest rate situation.
“Inflation pressure will force the central bank to increase the interest rate sooner than later. This will hurt medium-term and long-term debt funds. If you want to park your funds, a floater rate fund or a liquid fund will give you a similar return. However, if you do not have any specific need but want to allocate into debt from an asset allocation point of view, a safe short-term debt may be preferred,” says Ankur Kapur, Managing Director, Plutus Capital.
It is worth pointing out that floater funds were in demand last year as well when investors were hoping the RBI to increase interest rates.
However, there are some concerns relating to liquidity for these funds.
“We may see a good return in floating rate funds once the interest rates are revised however, floating-rate bonds are not freely available in the market, and this brings an element of liquidity-related risk to these funds for the investors. It is advisable to invest in ultra-short-term, liquid funds and some allocation in arbitrage funds only for your debt allocations," says Preeti Zende, Founder and Owner of Apana Dhan Financial Services.
For some time now, floater funds have seen a considerable outflow primarily due to average returns.
The Association of Mutual Funds in India (AMFI) data shows that floater funds witnessed net outflows of ₹7,338 crore in the month of March.
Returns posted by floater funds in past one year
| Name of the fund | 1-year-return (%) |
| Kotak Floating Rate Fund | 6.07 |
| Nippon India Floating Rate Fund | 4.88 |
| SBI Floating Rate Debt Fund | 4.35 |
| HDFC Floating Rate Debt Fund | 4.71 |
| Aditya Birla Sun Life Floating Rate Fund | 4.75 |
(Source: AMFI; direct returns as on Mar 31, 2022)
In the past one year, floater funds posted an average return of 3.93 per cent. But since the macro-economic scenario is undergoing a change.
In the wake of the changing market scenario, investors can explore a range of funds such as liquid funds, short-term funds, and even floater funds, based on their financial goals and needs.