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 theRead more on financialexpress.com