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Is it time to look closely at floater debt mutual funds?

A top performing floating rate mutual fund (or floater fund, as they are officially called) is offering double-digit returns in the last one year. No wonder, many conservative debt mutual fund investors have suddenly became curious about the floater fund category.

, ET Online|
Last Updated: Feb 26, 2020, 10.03 AM IST
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A top performing floating rate mutual fund (or floater fund, as they are officially called) is offering double-digit returns in the last one year. No wonder, many conservative debt mutual fund investors have suddenly became curious about the floater fund category. Take a look at the returns: the floater funds category has offered 8.66% in one year and 7.35% three years. The category has offered 6.52% returns in 2017, 6.74% in 2018, and 8.39% in 2019. The topper in the list of floater funds, Nippon India Floating Rate, has generated a return of 10.13% in one year.

According to Sebi norms, floater funds are open- ended debt schemes predominantly investing in floating rate instruments. The minimum investment in floating rate instruments should be 65% of the total assets managed by the funds. Floating rate funds aim to provide investors with a flexible interest income in a rising rate environment. However, mutual fund advisors say the category has failed to live up to the expectations.

Dilshad Billimoria, Founder, Dilzer Consultants, a wealth management firm based in Bangalore, put things in perspective: In the last couple of years, barring the schemes that got hit by downgrades, most debt schemes have done well. Similarly, floater funds, also given good returns when the rates are falling. However, their returns have been similar to that of liquid and low duration funds when the rates rise, says Billimoria.

Mutual fund advisors say if their past is any indication, these schemes are unlikely to perform spectacularly when the policy rates are likely to go up, “The problem with floater funds, just like dynamic bond funds, is that most of the times their mandate is not met. If that doesn’t happen, the entire point is lost. This is a good category when the rates are favourable. They will not give you best of returns but will minimise risk. However, these schemes haven’t made their mark in tough situations and changing rate cycles,” says Babu Krishnamoorthy, Chief Sherpa, Finsherpa, a wealth management firm based in Chennai.

However, some mutual fund adviosrs believe that conservative investors can bet on the category if they want to avoid extreme volatility. “These schemes invest in debt instruments with floating interest rates. They take advantage of the fluctuation in interest rates to generate quality returns. These schemes yield high returns during favourable interest rate movement that we have seen in the last couple of years. That is why the returns have been decent in the short term. These schemes are less volatile in the long term of two to three years,” says Gaurav Monga, Director, PxG Consultants, a wealth management firm based in Delhi.

Monga, however, clarifies that investors should keep in mind that these schemes also have credit risk. “Just like dynamic bond funds, the interest rate movement changes the coupon in these schemes. There is no doubt that they are safer than, say, a credit risk fund or a dynamic bond fund. However, they posses credit risk. There is a risk of default in payments. So, we can’t say that they are the safest and are also giving good returns,” says Gaurav Monga.

“Unlike short duration debt funds, these funds are less volatile. I suggest if investors want to go for a safer scheme and earn decent returns a liquid fund is a better place. Don’t just focus on returns here. Long duration bond funds have also given phenomenal returns in the last two years and this that is not the basis of your judgement,” says Babu Krishnamoorthy.
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