With rising gilt yields, floating rate funds back in vogue

Investors are getting out of monthly income plans (MIPs) and gilt-oriented long-term schemes to invest in floating funds in order to hedge interest rate risks due to rising yields of government securities.

With expectation of yields in government securities going up, investors are hedging their portfolio by shifting from long-term funds to short-term, less riskier funds, said Rajiv Anand, head-investments, Standard Chartered Mutual Fund.

Fund managers are of the view that the floating funds are not only witnessing shift of funds from other schemes but fresh subscriptions are also pouring in.

The subscriptions to the floating rate funds have gone up by three times over the last few months and total subscriptions now are pegged at around Rs 10,000 crore, said a mutual fund dealer.

"As there is uncertainty in the movement of yields in the medium and long term, fresh subscriptions are coming into the floating funds," said Sameer Kulkarni, head-fixed income, Templeton Mutual Fund.

Subscriptions to the floating funds are in addition to the cash/ liquid funds which are safe haven in all seasons for better cash management by major corporates, dealers said. Monthly income plans have ceased to be favoured among investors once the equity market started slowing down and dividend income tumbled.

In liquid funds, the most preferred investments are in treasury bills and repos as mutual funds have a restricted entry to the inter-bank call money market.

In fact, for seven days, an interest rate of 4.5 per cent is offered for investment in repos or 3.5-4 per cent inclusive of cost of investments in repos done with parties other than the Reserve Bank of India.

On the other hand, 91-day treasury bills fetch almost 4.8-4.9 per cent interest as against 4.26 per cent barely a month before. In floating rate funds, interest rate is linked to one-year government security or Mumbai inter-bank bid offer rate (Mibor).

Long-term funds with greater investments in gilts have taken a beating with gilt prices crashing every day by 20-25 paise across maturities. The ten-year benchmark 7.37 per cent 2014 gilt has witnessed yields going up from 5.13 per cent a month back to 5.41 per cent at present.