Floater funds see outflows as liquidity turns tight, shows data

Floater funds, which were in demand lately, have witnessed net outflows in November and December. Industry executives say the flows across the debt category have been negative amid tighter liquidity.

The data from the Association of Mutual Funds in India shows that the open-ended debt category saw net outflows of Rs 49,154.1 crore in December.

Floater rate funds have also seen net outflows of Rs 5,169.19 crore and Rs 6,460.18 crore in November and December, respectively. 

Sandeep Bagla, chief executive officer, TRUST Mutual Fund, says, “Floater funds give the impression they may provide superior returns when interest rates go up. In the past few months, investors have been expecting rates to move higher, and have hence, invested in floating-rate funds. However, investors might have realised that floaters are unable to deliver returns meaningfully different when market yields go up.”

In the past year, floater funds have on average given returns of 3.79 per cent, lower than other categories like low duration funds, short duration funds, and medium duration funds.

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 into floating via derivatives.

A floating-rate bond offers a coupon tied to a benchmark rate like the repo or the three-month treasury bills. The coupon resets periodically to factor in changes to interest rates, based on their movement.

Given the current scenario, market participants say we might witness a rate hike, which will help floater funds generate better risk-adjusted returns.