A floating rate fund invests primarily in floating rate instruments or in fixed coupon instruments that are converted to floating rate using overnight index swaps / swaps (OIS). âAs the returns in our economy change, floating funds will readjust their returns more or less based on prevailing returns. Going forward, we expect the RBI to normalize key rates by increasing them. interest rates in the near future. Bonds will face volatility in market valuation, which will impact their overall returns. In addition, the yield on Indian 10-year bonds has fallen from its low of 52 weeks, going from around 5.8% to 6.4% on various domestic and global factors. Taking advantage of rising yields, it makes sense for investors to get into float products, âsays Rushabh Desai, a distributor mutual fund registered at Amfi and based in Mumbai.
Floating funds have offered returns of 4.83% over the past year, which is more than any other category of debt fund except credit risk funds and mid-term funds. Even the favorites of the season – bank and PSU funds and corporate bond funds – have fared no better than these schemes. Best-in-class like ICICI Pru Floating Interest Fund and Kotak Floating Rate generated returns of 6.58% and 5.96% in one year.
âThere are some reasons why floating rate funds are better positioned at this point. Short term rates are really low. Due to rising inflation, there are fears that short-term rates may rise, causing volatility in debt funds. possible rate hike scenario, short-term funds may face challenges. However, when and if rates will rise is uncertain at this time, so switching to longer-term funds is not an option either. This is where a dynamic fund like a floating fund comes in. These funds minimize your risk of playing over time. They’re kind of flexible and nimble. They work in OIS (overnight interest swaps) so that you get slightly better returns than short-term funds right now and also minimize your rate risk suddenly rising, âsays Santosh Joseph, founder of Germinate Wealth Solutions, a Bangalore-based wealth management.
The Floating Rate Fund category has received the highest entries within the Debt Mutual Fund category over the past three months as investors believe the interest rate cycle is about to turn. reverse. Since most floating rate funds have an average term of 0.5 to 1.5 years, the risk of mark-to-market for these plans is low. However, these diets are not without risk.
âInvestors 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 is not a lot of floating rate bonds in our country, therefore the fund manager ventures into interest rate swaps. Floating funds are also not completely free from interest rate risk. The fund manager must be very Accurate and execute interest rate swaps on time. help reduce impact on the market. Investors can allocate a portion and use this category as a tactical call until interest rates stabilize in our economy. Investors should match their time horizon with the maturity profile of the fund. Investors who don’t understand how it works should either seek help or not venture into tactical betting, “explains Rushabh Desai.