March 21, 2022
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Interest in floater funds down..massive outflows on falling returns
According to the Amfi data , during February 22, floater funds saw net outflows of Rs 10,323 crore, highest in the current financial year. In the last six months, the category has seen net outflows of Rs 8,440 crore.
Interest in floater funds has started to decline as returns of the category have faltered in the last few months. With the tightening of liquidity, floater funds are seeing negative flows.
A floating rate bond offers a coupon tied to a benchmark rate like the repo or the three-month T-bills. The coupon resets periodically to factor changes in interest rates.
Unlike normal fixed rate funds, floater funds invest a minimum of 65 per cent in floating rate securities issued by corporates or the government or convert fixed interest securities to floating via derivatives.
The floater funds on an average earned only 2-2.5 per cent returns on an annualised basis. In the same period, liquid funds returned around 4 per cent. Even short-term funds returned similar returns.Investors deploy funds in floater schemes, hoping to earn higher returns than fixed rate funds at times when interest rates go up.
Typically, such funds are best suited in a rising interest rate situation and in 2021, were in demand as investors expected the Reserve Bank of India (RBI) to increase the rates.
The Investors got disillusioned and moved out the money from floater funds. The existing investors can hold the floater funds for an adequate period of time as returns are expected to improve going forward.”
Mutual Fund Experts indicate that given the current scenario, we might witness rate hikes in the next few months and investors can look at floater funds, short term bond funds and banking and PSU funds.