Mutual funds are broadly categorized as equity and debt funds. While equity mutual funds predominantly invest in equity and equity-related instruments of publicly listed companies to generate capital appreciation, debt funds mostly invest in government securities, debentures, treasury bills, repo rates, commercial papers, corporate bonds, etc. to deliver stable returns with minimum investment risk. To have the right balance of equity and debt, investors can first determine their risk appetite and invest accordingly.
Under debt schemes, there are multiple product categories that investors can consider for portfolio diversification. One of them is the floater fund which invests in floating securities. But what exactly are floating securities? Do they levitate? Let us fund out more about this fund in detail.
What is a floater fund?
Jokes apart, no, the underlying securities of a floater fund do not levitate. A floater fund is an open-ended debt mutual fund scheme that invests in debt securities that have varying interest rates. The underlying securities of a floater fund may deliver returns depending on how its underlying instruments react to market fluctuations of its underlying benchmark. This allows investors to benefit across market cycles as floater funds have the potential to deliver even when markets are fluctuating.
These mutual funds try to mitigate the overall investment risk by investing in debt instruments such as treasury bills, certificates of deposit, corporate bonds, etc.
What are the different types of floater funds?
The biggest mistake a lot of rookie investors make is when they end up investing in a mutual fund scheme without understanding all its aspects. For example, you may end up investing in a floater fund with a prenotion that all have a common investment objective and investment strategy. A floater can be categorized as a short-term floater fund or a long-term floater fund based on the underlying securities which it chooses to invest in for building its investment portfolio.
There are two types of floater funds –
Short-term floater funds: Short-term floater funds are debt funds that invest in and high liquidity such as certificate of deposits (CoDs), treasury bills government securities, etc. that mature over the short term and offer high liquidity.
Long-term floater funds: As the name suggests, these floater fund managers here choose to invest in instruments that have a longer maturity period. Such funds usually invest a majority of their investible corpus in floating rate debt instruments while the remaining of the portfolio consists of either fixed-rate securities or money-market instruments.
What are some of the salient features of a floater fund?
The investment portfolio of a floater fund usually consists of a mix of floating instruments whose rate of return varies depending on fluctuating interest rates. Such debt securities have the potential to perform across market cycles and might be able to churn returns across moving interest rates. This is different than other debt funds who only tend to deliver when the interest rates go down.
Less volatile than equity funds
Investors who wish to not risk their finances to market volatility usually avoid equity funds. With floater funds, such investors can expect stable returns with minimum investment risk. However, no investment is entirely risk-free and mutual fund advisors expect investors to choose a floater fund that invests in instruments that have a high credit rating.
Compared to traditional investment avenues like bank fixed deposits and public provident funds, floater funds have delivered far better returns in the past. This makes them a far better investment option than fixed interest rate offering schemes that have a low rate of return.