/9% returns in one year: Should you bet on floater funds?

9% returns in one year: Should you bet on floater funds?

Investors are betting big on floater funds or floating rate funds, shows data from Association of Mutual Funds in India. In the last three months (September-November), the category has witnessed a total inflow of Rs 13,515.96 crore. This is the highest quarterly inflow the category has seen in the last three years. Mutual fund advisors believe that the buying is majorly done by big corporate investors and HNIs. Are these schemes a good bet for retail investors as well?

Floater funds invest a minimum of 65% in floating rate bonds issued by corporates, central and state governments that offer variable interest rate. These funds do well when interest rates are set to rise since they have the ability to reset their yields as per the prevailing interest rate scenario. Floating rate funds typically have duration of two years and largely invest in AAA-rated instruments.

Let’s take a look at the performance of the category. According to data from Value Research, the floater fund category has offered 9.1% average returns in the last one year. This is one of the reasons why investors are looking at the category at the moment. Here’s the comparison of returns with other debt categories:

Category 6-month returns (%) 1-year returns (%) 3-year returns (%)
Floater Funds 2.21 9.01 7.93
Overnight 0.72 3.39 4.88
Money Market 0.92 5.60 6.89
Liquid 0.76 4.04 5.85

Source: Value Research

Another reason why investors are showing interest in this relatively new category of funds is the pause in the interest rates by RBI. The returns from the category are also going up because of slow down in the rate cuts.

“The RBI has held the policy rates for three consecutive times. This precisely means that even though the stance is accommodative, the likelihood of frequent rate cuts is very low. In 2021, we don’t see rates being cut drastically. In such a situation when our policy rates are already low, the floaters funds tend to benefit and offer higher returns. That is why many big investors started to put money in them,” says Neeraj Chauhan, CEO, The Financial Mall.

Rushabh Desai, an Amfi-registered mutual fund distributor, also agrees that floater funds are well positioned in the current scenario to generate good returns in the near future.

“The returns of floater funds tend to benefit the most during the rising interest rate cycle as the underlying bonds are market linked to an Index like repo, g-sec, mibor, nsc etc. These funds need to be timed well to get optimum returns. Observing the surplus liquidity in the economy and the hiked retail inflation the window for further cutting down on interest rates may have closed. This indicates that floater funds are well positioned to capture the upside benefits of the interest rates going forward,” says Desai.

Floater funds are a relatively new category in the mutual fund space which was formed in the re-categorisation of mutual funds in 2017. These schemes have been in the market for around three years but there are only eight mutual fund houses that offer these schemes. The primary reason for that is the shortage of issuers of floating rate bonds in the market. Hence, the market for floating rate bonds in India is less liquid. Fund houses deploy several strategies to fill in this gap and maintain liquidity, like Overnight Index Swaps or, OIS.
Here are the 8 schemes available in the market right now and how they have performed in the last one year:

Fund names 1-year returns (%)
Nippon India Floating Rate 11.64
Kotak Floating Rate 11.62
ICICI Pru Floating Interest 10.21
HDFC Floating Rate 9.40
ABSL Floating Rate 8.85
UTI Floater 8.50
Franklin Floating Rate 6.68
SBI Floating Rate Debt Fund NA

Source: Value Research

Mutual fund advisors believe that these schemes are a good bet for those investors who can time their entry and exits in the space and have a bigger portfolio to allocate a small portion to these schemes.

“Investors should not expect a sudden interest rate hike in the near term as the economy is very fragile and is still recovering. Mid to large size investors can take some tactical bet in this category with an ideal investment time horizon of 2 to 3 years. These funds are not credit risk proof and one will need to look at the funds individually before investing,” says Rushabh Desai.

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