The Hindu Business Line : Inflows rush into MIPs, floating rate funds

`WOULD you be interested in exploring a story on floating rate products?' queries a mail from a corporate communication firm. This is as clear a signal you can get that mutual funds are now aggressively pushing floating rate funds. And such an aggressive push seems to be getting the results. Inflows into floating rate funds rose by more than 200 per cent in the first four months of 2004.

Asked if the marketing push is responsible for the increase in inflows, Mr Suresh Soni, Head-Fixed Income, Deutsche Asset Management (India) Pvt Ltd, says it is a bit of both marketing push and investors seeking such funds.

He says floating rate funds are a better option compared to liquid funds. Investors find the promise of consistent returns attractive. Further, floating rate funds will also outperform liquid funds over a one- to three-month period, he says.

Mr A. Balasubramaniam, Head of Fixed Income at Birla Sun Life Asset Management, also affirms that institutional investors are switching, either into short-term funds or floating rate funds, given the apprehensions about the spike in interest rates.

Mr S. Naganath, CIO of DSP Merrill Lynch MF, says lateral switches are not very high within DSP ML funds, but that "incremental flows into debt funds are going mainly into floating rate products."

When asked if funds are advising investors to switch into floating rate funds from income funds, Mr Soni replied in the negative. He says mutual funds are advising investors to switch from diversified income funds to shorter-term funds and are asking investors to consider floating rate funds in place of liquid funds.

Mr Soni says this strategy is being suggested because the scope for higher returns from investing in long-dated securities is rather limited. Mr Nandkumar Surti, Head of Fixed Income at JM Mutual Fund, also emphasises this aspect. According to him, investing in an income fund will probably get just one percentage point better than a shorter maturity fund or a floating rate fund. Both fund managers indicate that a bull market in debt markets will not necessarily come back.

Further, Mr Soni says the trend of rising inflows into floating rate funds is also healthy. This is because such funds have low volatility and low costs compared to short maturity funds. On the other hand, the trend of rising inflows into monthly income plans may not necessarily be healthy, Mr Soni says. This is because people have come into MIPs with a short-term horizon when such investments require an investment horizon of at least one year and preferably three years.

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