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One year performance data of debt funds shows that floater funds have delivered highest returns across all debt fund categories.
Many floater funds delivered close to 8% in the last one year. Of the 12 schemes in this category, 6 schemes outperformed their benchmark. Currently, floater funds manage AUM of over Rs.52,500 crore as on March 2024.
By notion, floater funds are meant to do well during interest rate hike regime. However, due to lack of availability of floating rate instruments, the fund managers buy synthetic floaters. This is done through Overnight Indexed Swap (OIS) where interest rate of fixed and floating are swapped. Combining both floating rate bonds in portfolio and synthetic floaters, fund managers satisfy the 65% criterion.
Debt guru, Joydeep Sen pointed out that these category of funds have benefited from rate hikes and liquidity tightening measures by RBI. However, he recommended MFDs to stay away from floater funds considering the complex nature of these funds. He said, “Financial products are comparable to medicine; medicines are good if it is prescribed with a proper diagnosis of patients. Floating rate funds need to be understood and every AMC has a unique strategy for the fund, which needs to be understood by the advisor/distributor. Remember that you should not position these funds solely on expectation of rate hike by RBI.”
Amit Biwalkar, Founder, of Sapient Finserv said that RBI’s record dividend of Rs 2.11 lakh crore plays a big role in not recommending floater funds. He said “You shouldn’t have a floater fund right now. The RBI has just declared a good dividend, meaning almost 20 basis points of the fiscal deficit have been taken down. This means the benchmark bond yield has retreated below 7% after a very long time. Therefore, a short-duration fund will make much more sense than a floater fund.”
Amit Shah, the founder and CEO of Wylth shared that while floater funds are a good concept, Indian markets do not have adequate supply of such bonds. He said “There is no market currently for floater funds in India. We have done it in the past but there’s not enough liquidity in the country. Additionally, in the current scenario where inflation won’t go down expectedly, interest rates will also come down thus floaters will suffer.”
Chokkalingam Palaniappan of Pakala Wealth, Chennai said that since the interest rates are expected to go down in the next year, he is not recommending floater funds.
Vishal Dhawan of Plan Ahead Wealth Advisors said that they are avoiding floating funds currently as the interest rates are expected to go down or remain flat over the next year. He said “Floating funds are ideal to invest in when interest rates are headed upwards to try to take advantage of better yields that may accrue to the floating rate instruments held by the schemes. We would avoid floaters as the expectation is that interest rates could remain flat or go downwards over the next year, which is not the ideal investment option in our view.”
