Interest in floater funds wanes over massive outflows, faltering returns

Amfi data shows that floater funds saw net outflows of Rs 10,323 crore, highest in the current financial year, in Feb

Interest in floater funds has started to wane as returns of the category have faltered in the last few months. Market participants believe that with the tightening of liquidity, floater funds are seeing negative flows.

The data from the Association of Mutual Funds in India (Amfi) shows that in February, 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.  

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. 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.

Sandeep Bagla, CEO, TRUST Mutual Fund says, over the last three months, 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. Disappointed investors turned away from the floater funds and its sub-optimal performance in a period where rates had risen,” added Bagla.

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. But the central bank continued its accommodative stance to support economic growth.  

In the last one year floater funds have given average returns of 4.4 per cent, lower than dynamic bond funds, gilt funds and banking, and PSU funds.

Joydeep Sen, corporate trainer-debt further explains, “There is something technical in this; instruments in floating rate funds will get the higher reset only on the next reset date, so there is a waiting period involved. Any which way, 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.”

Market participants say 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.

However, Sen still believes that currently when the RBI is set to hike interest rates, target maturity funds are the best bet in the debt fund category.