Floating with the tide

Floating-rate funds are attracting unprecedented inflows. What are these funds and should you invest in them?

Interest rates are at their rock-bottom levels, owing to the RBI’s pro-growth measures in response to the pandemic. But once economic growth is firmly back on track, interest rates will inevitably start rising. Expectations are that it may happen sometime around the turn of the financial year. In anticipation of an increase in interest rates, many investors are flocking to floating-rate funds. In July this year, the category witnessed net inflows of over ₹7,400 crore, the highest ever since AMFI started declaring its monthly numbers. Over the past one year, the assets managed by the category have grown at the highest rate among other open-end debt categories and more than doubled in this time frame. Four AMCs have launched their floater funds this year, together mobilising about ₹2,500 crore.

What are floating-rate funds?

As the name suggests, these funds are mandated to invest at least 65 per cent of their assets in floating-rate bonds. Unlike conventional fixed-interest bonds, the interest rate on floating-rate bonds keeps changing in line with the changes in interest rates in the economy.