The Hindu Business Line : Floating rate funds see renewed interest

FLOATING rate funds seem to be staging a comeback, attracting higher inflows than what they did till recently. Serving as background is the view that normal debt funds will not deliver satisfactory returns in the days ahead.

Debt fund returns have disappointed investors in recent times, a fact that is borne out by the comparatively poor performance figures that have come in so far. Investors, large sections of whom have already shifted to liquid and short-term schemes, are increasingly looking at alternative ways of deploying money. Some of them have started to actively consider floating rate products.

With interest rates appearing to bottom out and volatility gaining the upper hand, the market is aware that normal debt funds will not give it any reason to cheer, indicate fund circles, adding that including these in one's portfolio could well increase risks, at least over the short and medium terms. Investors, given such a reality, need additional exposure to schemes that will both protect capital and generate steady income.

The `floaters', which seek to invest in floating rate securities, may be regarded as good bets in these circumstances, especially so if interest rates firm up, sources say. Such funds will continue to aim at providing stable performance by following relatively low-risk strategies.

It is, however, felt that floating rate products are yet to be fully tested in the Indian market. For one thing, they do not have a history spanning a decent length of time. Most floaters - a number of players introduced these in 2003 - have not been in existence for long.

Further, it is believed that fund managers generally have a tough time identifying the right floating rate instruments, as the choice before them is quite limited.

Depressed sentiments on the debt front have already helped liquid funds, which have drawn considerable inflows over the past couple of months, it is pointed out. At another level, a section of the fund management fraternity is currently in favour of maintaining a comparatively high exposure to liquid assets in portfolios of floating rate products. Tata MF's floater scheme, for instance, had around 18 per cent in cash and similar investments in end-February, with mainline debt accounting for 82 per cent.