Why Floating Rate Funds Are A Good Bet

Suresh Soni: So, within the fixed income, first of all… We have seen rising interest levels. So, what you have had is post-Covid a sharp decline in the interest rates which was done by all the central banks in a synchronised fashion. India joined that as well. 

We had a large cut in rates and over the last six months, the central bank is actually reversing that and we have already seen an interest rate hike of 140 basis points. 

When that happens, when interest rates rise, the fixed rate securities or the typical conventional bonds suffer because if you are holding a bond at 7% yield, market rates have gone up by 100 basis points, you will have to sell that bond at a loss so that the buyer gets 8% yield. 

So, in order to protect against these kind of fluctuations, what you have is either you can choose to go into a liquid fund or …you could choose the floating rate funds, where essentially the interest rates float along with the market. 

So, what do these funds do? About two thirds of the portfolio… is invested in the bonds which have rates due to the benchmark rates at that point of time. You can think of it like your home loan EMI. So, if the rates go up, the interest rate on your home loan goes up. Similarly, if the interest rates in the market rises, the interest rates on the floating rate bond also rises.

Therefore, irrespective of the market environment, generally the floating rate funds reflect the current prevailing interest rates. 

You said the category has lost some amount of AUM… The category was about Rs 30,000 crore two years back. By March this year, it touched a high of about Rs 80,000 crore and from thereon, of course, we have seen a withdrawal of about Rs 15,000 crore from the funds…

But what has happened is in the last six months, as Mrin was also saying earlier, we have seen some amount of withdrawal from fixed income funds in general. So, other than liquid, the fixed income mutual fund industry has lost about Rs 80,000-90,000 crore. 

Floating rate funds have also lost about Rs 15,000 crore. But this is a category which has generally done well for investors over a period of time. 

If you look at the past returns performance in calendar 2019- 2020, it generally reflected the market interest rates. Even if you look at short-term returns over the last few months, it’s done fairly well. So, this is something which is suited for people who have got, let’s say, a time horizon of about six months thereabout. They can park their money there and can get market-related interest rates irrespective of the market conditions.