The Hindu Business Line : Floating rate funds

WITH fund houses' `interest rate outlook' anticipating a hardening in the near future and with the bond markets remaining volatile, floating rate funds and dynamic bonds continue to be the flavour of the moment for asset management companies.

Over half a dozen fund houses have launched floating rate funds or dynamic bond funds in the last few weeks.

Investments in floating rate debt instruments yield optimal returns when volatility is high and the market is not able to take a call on exactly where interest rates are headed in the short term. Despite the rally in Government bonds, the underlying uncertainty in the market continues. Traders are closely watching inflation numbers to base their views on interest rates.

"Debt funds have been witnessing steady outflows since September 2003. This money has largely been diverted to floating rate funds, considering the current scenario, especially by people who have a view that interest rates will harden," said Mr Sashi Krishnan, Chief Investment Officer, Cholamandalam AMC Ltd.

Floating rate funds have posted average returns of 1.08 per cent for the last three months and annualised returns of 4.61 per cent.

Large fund houses have registered huge corpuses in the category. Templeton Floating Rate - Short term - has a corpus of over Rs 2,700 crore while the Grindlays Floating Rate Fund and Prudential ICICI Floating Rate B have both upward of Rs 2,200 crore in their kitty. HDFC Floating Rate and DSP Merrill Lynch Floating rate funds are also in the four-digit corpus size.

Distributors confirm that there is a continued interest and inflow into these funds. "In June and July, fund houses that did not have a floating rate fund in their product portfolio witnessed sharp drops in their corpus. Inflows into these funds continue as floating rate funds are expected to post higher returns than liquid funds. The incremental increase in risk is negligible," said Mr Ranaa Kumar, Karvy Distribution Services.

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