Understand the risk and rewards associated with floater funds

To allow your investment portfolio to outperform over the long term, mutual fund investors must adequately diversify among various asset classes. Investors with a very high-risk appetite often prefer only investing in equity, not realizing that the markets fluctuate from time to time. It is never a good idea to only depend on any one asset class to deliver returns. Investors must ensure that they invest in the right mix of equity and debt so that whenever one asset class underperforms, investments made in the other asset class can balance out the risk factor.

Such investors with an equity-heavy portfolio seeking diversification in a different asset class can consider investing in floater funds.

What are floater funds?

While equity funds predominantly invest in company stocks, currencies, and global markets to generate returns, debt funds like floater invest in debt instruments like Certificate of Deposit, treasury bills, corporate bonds, etc. They try to deliver returns by predominantly investing in securities with floating interest rates. Such debt securities have the potential to perform across fluctuating interest rates and can allow the floater fund to perform across market cycles.

Floating rate instruments have variable interest rates unlike other debt instruments like bonds that have a fixed interest rate. A lot of investors are now preferring floater funds over traditional investment avenues as they have delivered better returns in the past few years. 

Benefits of floater funds

Floater funds offer diversification like no other debt mutual fund scheme. Floating rate instruments, in which floater funds predominantly invest tend to deliver decent returns when interest rates are moving in a favorable position. Such funds can even be considered for the long term and may deliver better returns than other debt funds. These funds are far less volatile than equity mutual funds where the investment risk is very high. Investors looking to shift from traditional investment avenues or looking to add some diversification can consider investing in floater funds. While the risk in equity funds is very high, floater funds can offer stable returns with minimum investment risk.

As mentioned earlier, floater funds have historically outperformed traditional investment products like bank fixed deposits. Adding to that, they have also outperformed several other debt mutual funds over the long term, which makes them an ideal investment for those seeking long-term investment options outside equity. 

What are some of the risks associated with floater funds?

Just because they are debt funds that aren’t as volatile as equity funds don’t make floater funds entirely risk-free. No investment in a mutual fund is entirely free of risk, and no scheme ever offers guaranteed returns. There are certain limitations for building such an investment portfolio of floating-rate instruments which investors should be aware of before investing in floater funds. Returns generated by floater funds cannot be predetermined. Any investment risk in this fund can be mitigated by opting for the SIP option.

A Systematic Investment Plan also known as SIP is a simple and convenient way of investing in mutual funds. Investors can invest small fixed amounts in floater funds via SIP instead of making a one-time lump sum investment. This way, investors can benefit even when the NAV of the scheme falls. When the NAV falls, investors can buy more units, and eventually, when the fund gains back its momentum, the value of these units will go up in the long run. Investors can now use the SIP calculator to understand how much money they need to invest in floater funds via SIP regularly to achieve the desired corpus.

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