Why floating rate mutual funds are seeing strong investor interest

Floating rate funds continued to see strong inflows amid anticipation of tighter tighter liquidity conditions going ahead. These fund saw net inflow of 10,000 crore in August, taking overall net asset management of floater category to 94,751 crore, according to latest Association of Mutual Funds in India (AMFI) showed.

Unlike other category of debt mutual funds, floating rate funds benefit from rising interest rates. These funds seek to generate returns by creating a portfolio that is primarily invested in floating rate instruments, including fixed rate instruments swapped for floating returns and other debt and money market instruments.

Lakshmi Iyer, Chief Investment Officer (Debt) & Head Products, Kotak Mahindra AMC, said: “August month saw continued flows in floating rate category in fixed income with net sales of nearly Rs. 10,000 crore. Anticipation of tighter liquidity conditions due to RBI announcement of additional VRRR or variable reverse repo rate auc could have prompted this move. Categories like medium to long term, gilt etc. also saw positive net sales as the steep yield curve offers cushion to any potential abrupt rise in rates.”

Overall, debt mutual funds showed a net inflow of 1,000 crore in August, pushing the total net asset under management to 14.74 lakh crore. 

Last month, the RBI maintained its status-quo on the policy stance, keeping the repo rate unchanged and continuing with the accommodative stance. However, it raised the FY22 CPI estimate to 5.7% vs. 5.2% earlier. The RBI further indicated that a key reason attributed to the high inflation rate is prevailing adverse supply chains though it expects bottlenecks to be resolved as the economy normalizes. 

“We believe the yield curve to remain steep given the ample liquidity in the system towards the lower end of the yield curve while the longer end of the yield curve remains cautious owing to the risk of inflation and the policy normalization. In light of high uncertainties over the interest rate trajectory, it would be prudent for the investors to be on the conservative side. In conclusion, we continue to favour a Quality approach in bonds with some non-AAA exposure based on individual risk appetite,” said Axis Securities in a note. 

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