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How floating rate funds help you

October 15, 2004 15:50 IST

The sorry state, in which debt fund investors find themselves, has been well documented over the past 12 months. Conventional debt funds -- a category that was the investors' favourite during the incessant rate cut regime -- has completely fallen out of favour at present.

Negative returns have virtually become the order of the day and rising inflation hasn't helped either.

However, floating rate funds, another breed from the debt funds segment, caught the investors' fancy around the same period.

We, at Personalfn, decided to put the performance of debt funds under the scanner to determine who the top performers were and how they fared.

Debt funds: Top performers over 6 months
Debt FundsNAV (Rs)6-Mth
DSP ML FLOATING RATE10.712.37%
GRINDLAYS FLOATING RATE10.242.30%
PRU ICICI FLOATING RATE10.762.27%
BIRLA FLOATING RATE LTP10.682.24%
DEUTSCHE FLOATING RATE10.452.24%
(Source: Credence Analytics. NAV data as on October 11, 2004.)

Over a 6-month period, floating rate funds dominated the proceedings. In fact no conventional long-term debt fund features in the entire list. DSP ML Floating Rate (2.37%) emerges as the top performer followed by Grindlays Floating Rate (2.30%).

Debt funds: Top performers over 1-Year
Debt FundsNAV (Rs)1-Yr
DSP ML FLOATING RATE10.714.85%
TEMPLETON FLOATING RATE11.714.77%
BIRLA FLOATING RATE 10.684.75%
PRU ICICI FLOATING RATE10.764.72%
GRINDLAYS FLOATING RATE10.824.54%
(Source: Credence Analytics. NAV data as on October 11, 2004.)

A similar picture emerges over a 1-Yr period as well. Yet again floating rate funds emerge winners and no long-term debt fun makes it to the top performers list.

  • Get top performers across categories and time horizons.

    Now for the returns. The top performer over a 1-Yr period i.e. DSP ML Floating Rate (4.85%) pitches in a performance that can at best, be described as modest. Even a fixed deposit investment that was made a year ago would have easily outperformed the top performer from the debt funds segment.

    The interest rate scenario at present is far from conducive for investments in conventional debt funds. However floating rate funds have the ability to provide a hedge against rising interest rates, thanks to the periodical readjustment in coupon rates.

    As long-term investment avenues, floating rate funds should at best be selected for capital preservation. Clocking a return should be the secondary objective, else the investor will find himself very disappointed with the returns these funds generate.



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