With interest rates at all-time lows, these are tricky times for fixed income (debt) investors. The consensus view seems to be that we are done with the rate cut cycle and the RBI may gradually start increasing rates. Most debt fund categories have delivered handsome returns in the past 2-3 years given the series of rate cuts. But if the rates start increasing, investors will have to moderate their return expectations. Given this backdrop, a lot of people have started talking about floating rate funds and how investors can use them in a rising rate environment. But the reality is that it is not quite that simple. Coincidentally, IDFC Mutual Fund has just launched its floating rate fund. So, we caught up with Arvind Subramanian, fund manager & head of credit research at IDFC Asset Management to learn how these floating rate funds work and if how investors should think of them in a rising rate environment. In this conversation Arvind talks about:
- How his journey in the markets began
- The current Indian interest environment
- What are floating rate funds?
- How do they work
- What are interest rate swaps and how are they used to create synthetic floating rate bonds
- Investment universe of floating rate funds
- Role of a fund manager
- How floating rates perform in rising and falling rate environments
- Whether floating rate funds are a perfect hedge for rising rates
- Where does a floating rate fund fit in a debt asset allocation framework?
- Risks in these funds
- Return expectations
- His personal investing philosophy and how he invests
We also highly recommend you listen to this conversation with Suyash Choudhary of IDFC Mutual Fund on how to get your asset allocation right when investing in debt funds. This conversation perfectly compliments the conversation with Arvind on floating rate funds.
If you have any questions about floating rate funds or debt funds, do post them here.
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