Floating Rate Funds See 23% Erosion In Assets In Four Months

Floating rate funds or floater funds are debt-oriented funds that invest in floating rate instruments. This is meant to give the investors the benefit of the changing interest rate scenario as the instruments in the portfolio reset their interest payouts at regular intervals.

In the last four months, these funds have seen a massive outflow with its assets under management dropping 23% to Rs 63,624 crore at the end of August 2022. Here is a look at how steadying inflation, lower returns and attractiveness of other debt funds have prompted this change of investor interest.

Extent Of Outflow

The last calendar month when floater funds received a net inflow was in April 2022 when there was an inflow of Rs 1,518 crore, and at the end of the month the assets under management was Rs 82,301 crore. This was also the period when there was a lot of uncertainty in India about rising inflation and surging bond yields.

After that there has been a change in trend with the next two months seeing a sharp net outflow of Rs 5,285 crore and Rs 7,077 crore, respectively. The outflows from this category have slowed down after that in the last two months but the trend has not reversed and the outflow in August was still in excess of Rs 2,000 crore.

Changing Debt Market Scenario

Floating rate funds are usually added to the portfolio of investors when there is a rising interest rate scenario and there is uncertainty about the extent and the timing of the rise. The idea behind such a move is to ensure that the investment does not get locked into lower rates of return.

The floating rate instruments will reset the interest rates at regular intervals and this can increase the returns. Thus floating rate funds are expected to tackle a rising interest rate scenario better than a long-term debt fund. In a long-term debt fund the rising rates would reduce the prices of bonds more resulting in a bigger negative impact.

In India there has been relief on the inflation front in two ways. One is that while inflation is still higher than the Reserve Bank of India’s targeted maximum rate of 6%, there has not been a runaway rise which can cause huge disruption like what has been seen in the U.S. and many European countries. The other point is that in recent months there has been moderation in the rate and this has stagnated around the 7% mark. This has raised the confidence of the investors that inflation might not go up too much as the RBI is also tightening aggressively.

The consequent impact of this has been seen in the yields in the secondary market where even the 10-year yield has come down slightly from its highs and is now steady since some time. This again has boosted the confidence of the investors who are now ready to take a specific position with respect to their debt funds rather than leave the money with a floating rate fund.

Higher Return In Alternative Options

The overall rise in yields on debt instruments from last year has meat that several categories of debt funds have become more attractive than before. One is that of liquid funds where a year or so ago the annual yields had fallen to around 3% and now these are back above 5%.

In addition for long term products like fixed maturity plans or target maturity funds, the yield has gone up significantly as compared to the situation a year before. Compare this to the one-year return on the regular plans of floater funds that are between 2.75% and 3.75%. This is also the reason why these categories have become more attractive for investors. In such a situation it is logical that advisors and investors are moving funds from floating rate funds to these categories to earn better returns.

(Arnav Pandya is the founder of Moneyeduschool.)