If you are a low-risk investor, you would likely prefer investing in debt mutual funds since they carry minimal risk. However, there are different types of debt funds. Some of the most popular ones include dynamic bonds, gilt funds, income funds, liquid funds, etc. One less popular category of debt funds is the floater fund. If you want high returns but secure mutual fund investments, you can opt for floater funds, a type of debt mutual fund that offers floating interest rates.
Here is everything you should know about floater funds:
What are floater funds?
Floater funds are debt mutual funds that invest at least 65% of their assets in bonds with a floating interest rate. Generally, debt mutual funds invest in bonds that offer a fixed interest rate. However, in floater funds, the interest payout changes according to the economic interest rate fluctuations. This allows investors to benefit from the business cycle fluctuations and get high returns. The annual returns from floater mutual funds range between 5% and 9%.
The objective of these mutual funds is to mitigate risk by investing in secure debt tools, such as corporate bonds, government securities, certificates of deposit, etc. Further, investing in floater funds through the SIP (Systematic Investment Plan) mode also helps to reduce risk since distributed investments across a long period ease-out interest rate fluctuation.
What are the different types of floater funds?
- Short-term floater funds: These mutual funds invest in debt securities with a short maturity period such as government securities, T-bills, certificates of deposits, etc. These instruments are highly liquid.
- Long-term floating funds: These mutual funds invest in debt securities with a long maturity period.
How do floater funds work?
Floating mutual funds invest in securities like corporate bonds and debt instruments that have a floating interest rate. These securities do not offer a fixed coupon rate, and the market interest rate primarily determines the interest payout of the floater mutual funds.
Any change in repo rate by the Reserve Bank of India (RBI) impacts the return rate of floater funds. With the rise in repo rate, the interest rate for floater mutual funds increases because the market lending rate rises, affecting the return of all market-linked debt securities. The change is reflected in the mutual fund’s NAV (Net Asset Value). A fall in repo rate reduces the interest for floater funds, reducing the NAV and subsequently the returns to the investors.
Should you invest in floater funds?
Floater mutual funds are sensitive to interest rate fluctuations. Hence, they carry high risk despite investing in secure debt instruments. A fall in the economic interest rate could deliver lower returns. However, floating mutual funds are a good option when the interest rates are likely to go up.
There is a risk of default subject to individual fund lending strategy. But investing through the SIP mode and choosing short-term floating mutual funds helps to keep the risk down. If you want predictable returns, you can choose liquid or ultra-short duration mutual funds.
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