The Hindu Business Line : Floating rate funds

MUTUAL funds are always in a hurry to make the most of a given situation, a fact that explains why so many floating rate products have been launched in recent times. While `floaters' continue to remain a major talking point in investment circles, there is a lot more to the market than just these.

It is amply clear that the season for floaters is yet to be over. In fact, fund houses that are eager to capitalise on the market's penchant for floating rate options are still launching new schemes. An analysis of the assets currently managed by floaters will tell us how these schemes have done in terms of collection.

Kotak Mahindra MF is the latest to work out a floating rate product. Kotak Floater Long Term, the MF has pointed out, is aimed at mitigating interest rate risks and delivering reasonable returns in a scenario marked by rate increases.

Generally speaking, funds such as these are expected to appeal to those who do not wish to allocate fresh money to traditional, fixed rate options. For investors who want to know more, the latest Kotak scheme proposes to allocate at least 65 per cent of its assets to floating rate paper/money market instruments with outstanding maturity of up to 182 days.

Interest rates, the MF has noted, will be a cause for concern in the days ahead. Mr Ajay Bagga, who heads the fund house, feels the rates scenario may well be volatile in future; investors, therefore, should seriously look at managing risks that originate from interest rates. Interestingly, derivatives too should be used in the most efficient manner.

Let's tune in at this juncture to Sundaram MF, an outfit that is often branded as conservative and orthodox. A commentary from the fund has referred to what it calls `the three Rs' - rate hikes, results and rains! It further dwells on how the money market rates have remained steady in recent days, while the spotlight has shifted from "short-term papers to longer-term floating rate bonds with short-term resets".

The trend is said to be quickly getting popular among mutual funds - seemingly an easy way out for fund managers who wish to avoid long-duration bonds (and bear mark-to-market risk) and get some yields better than short-term papers.

As for the corporate bonds market, sentiments have been lately lacklustre and volumes have been relatively low. Bond investors have remained cautious while taking fresh positions. Most actions are now in floating rate bonds as many mutual funds find them comparatively safer, it is pointed out.

Feedback may be sent to blcal@vsnl.net

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