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livemint.com / 2 years ago
MUTUAL FUNDS: Hedge rate risks with floater funds
As floater funds mitigate interest rate risks and adjust the duration based on prevailing interest rates, investors are finding them attractive. In August, when most debt-oriented schemes saw net outflows, floater funds attracted net inflows of `2,325 crore, data from Association of Mutual Funds in India show.
Floater funds invest in debt securities where coupon rate is dynamic in nature. The funds invest in a blend of floating rate and fixed-rate instruments, including government securities, corporate bonds, and money market instruments. The diversification spreads risk and potentially delivers higher risk-adjusted returns compared to bank fixed deposits.
Experts recommend such funds to those who want to invest for a short term, say, six months, as these are protected from interest rate risk. Moreover, these funds carry lower risk compared to equity instruments, making them suitable for risk-averse investors.
Adjust fund duration
Investors seek funds with the ability to re-align fund exposures in sync with the prevailing interest rate environment. “Considering borderline risks of a rate hike, a floater rate fund will be able to effectively reflect higher interest accruals in sync with the external rate environment,” says Nirav Karkera, head, Research, Fisdom. “At the same time, a relatively lower duration and relatively higher credit quality ensure effective risk mitigation.”
When interest rate conditions are uncertain or inflation is likely to be high, floating-rate funds seem to attract inflows. Says Abhishek Banerjee, founder and CEO, Lotusdew Wealth and Investment Advisors, “The bonds themselves have floating rate coupons or inflation-linked coupons which automatically adjust the fund duration which is the
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