Why Floating Rate Mutual Funds Are Getting Strong Investor Interest


Floating rate funds continued to register strong inflows amid anticipation of tightening liquidity conditions to come. These funds recorded a net inflow of ??10,000 crore in August, bringing the overall management of the floating category’s net assets to ??94,751 crore, according to the latest Association of Mutual Funds in India (AMFI) showed.

Unlike other categories of debt mutual funds, variable rate funds benefit from rising interest rates. These funds seek to generate returns by creating a portfolio primarily invested in floating rate instruments, including fixed rate instruments traded for variable returns and other debt and money market instruments.

Lakshmi Iyer, Chief Investment Officer (Debt) and Products, Kotak Mahindra AMC, said: “August saw continued flows in the variable rate fixed income category with net sales of nearly Rs. 10,000 crores. The anticipation of stricter liquidity conditions due to the RBI’s announcement of an additional VRRR or a variable repo rate auc could have been at the origin of this decision. Categories like medium to long term, gilts, etc. also recorded positive net selling, as the steep yield curve provides a cushion to any possible sharp rise in rates. “

Overall, debt UCITS recorded net inflows of ??1,000 crore in August, pushing total net assets under management to ??14.74 lakh crore.

Last month, the RBI maintained its status quo on the direction of its policy, keeping the repo rate unchanged and continuing its accommodative stance. However, it raised the CPI estimate for FY22 to 5.7% from 5.2% earlier. The RBI further indicated that a major reason attributed to the high inflation rate is the persistence of unfavorable supply chains, although it expects bottlenecks to be resolved as the economy is normalizing.

“We believe the yield curve will remain steep given the abundance of liquidity in the system towards the lower end of the yield curve, while the longer end of the yield curve remains cautious due to risk. inflation and policy normalization. Given the strong uncertainties about the path of interest rates, it would be prudent for investors to be cautious. In conclusion, we continue to favor a Quality approach in bonds with some non-AAA exposure based on individual risk appetite, ”Axis Securities said in a note.

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