Floater mutual funds are a type of debt mutual fund that invest a majority of their assets (at least 65%) in floating-rate instruments. These instruments, such as floating-rate notes (FRNs) and bank loans. They are also known as floating rate mutual funds.
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Floater mutual funds work by investing primarily in debt instruments with variable interest rates, such as floating rate notes (FRNs) or adjustable-rate bonds. Here's a breakdown of how they typically operate:
Investment in Floating Rate Securities
Floater mutual funds primarily invest in debt instruments with variable interest rates, such as floating rate bonds issued by Indian corporates, financial institutions, and the government. These securities typically have interest rates that reset periodically based on changes in benchmark rates like the Reserve Bank of India's (RBI) policy rates or other market reference rates.
Interest Rate Protection
The variable interest rates on the securities held by floater mutual funds adjust in response to changes in market interest rates. When interest rates rise, the interest payments on the securities also increase, providing investors with protection against interest rate risk. This feature makes floater mutual funds attractive to investors concerned about rising interest rates.
Low Sensitivity to Interest Rate Changes
Unlike fixed-rate bonds, which experience price declines when interest rates rise, the prices of floating rate securities are less sensitive to changes in interest rates. This characteristic helps mitigate interest rate risk for investors in floater mutual funds.
Income Generation
Floater mutual funds primarily generate income through interest payments from the floating rate securities in their portfolios. Since the interest rates on these securities adjust with changes in market rates, the income generated by floater mutual funds can be relatively stable, even in a rising interest rate environment.
Credit Quality
While floater mutual funds focus on variable-rate securities, they still consider credit quality when selecting investments. Fund managers typically invest in floating rate securities issued by high-quality issuers to mitigate credit risk.
Diversification
Floater mutual funds aim to diversify their portfolios across different issuers and industries to spread risk. Diversification helps reduce the impact of defaults on the portfolio and enhances overall risk management.
Floater mutual funds offer several advantages for investors, particularly those seeking income generation with some protection against interest rate fluctuations. Here are some key advantages of floater mutual funds:
Interest Rate Protection
One of the primary advantages of floater mutual funds is their ability to provide investors with protection against rising interest rates. Unlike fixed-rate bonds, the interest rates on the securities held by floater mutual funds adjust periodically in response to changes in market interest rates. This feature helps preserve the value of the investment and mitigates interest rate risk.
Stable Income Generation
Floater mutual funds typically generate income primarily through interest payments from the floating rate securities in their portfolios. Since the interest rates on these securities adjust with changes in market rates, the income generated by floater mutual funds can be relatively stable, even in a rising interest rate environment. This makes them attractive for investors seeking regular income streams.
Lower Interest Rate Sensitivity
Floating rate securities held by floater mutual funds have lower sensitivity to changes in interest rates compared to fixed-rate bonds. As a result, the prices of these securities are less impacted by changes in interest rates, reducing the overall interest rate risk for investors.
Diversification
Floater mutual funds typically invest in a diversified portfolio of floating rate securities issued by various issuers and industries. Diversification helps spread risk across different sectors and issuers, reducing the impact of defaults on the portfolio and enhancing overall risk management.
While floater mutual funds offer several advantages, they also have limitations and considerations that investors should be aware of before investing. Here are some limitations of floater mutual funds:
Lower Returns
While floater mutual funds provide protection against rising interest rates and offer stability in income generation, they generally offer lower returns compared to higher-risk fixed-income investments. Investors seeking higher returns may need to consider alternative investment options.
Limited Upside Potential
Since floater mutual funds primarily invest in debt instruments with variable interest rates, they may have limited upside potential during periods of declining interest rates. While they offer protection against rising rates, they may not benefit as much from falling rates compared to fixed-rate bonds.
Credit Risk
Although floater mutual funds focus on higher-quality floating rate securities, they still carry credit risk. Investments in corporate bonds or other debt instruments are subject to the risk of issuer default or credit deterioration. Investors should carefully assess the credit quality of the securities held by the fund.
Interest Rate Timing
Timing can be crucial when investing in floater mutual funds. If interest rates remain low or decrease after an investment is made, the fund's performance may be negatively impacted. Investors should consider the prevailing interest rate environment and economic outlook before investing.
Before investing in a floater mutual fund, it's crucial to consider several key points to make informed investment decisions and manage risks effectively. Here are some points to consider:
Interest Rate Outlook
Assess the prevailing interest rate environment and economic outlook. Since floater mutual funds primarily invest in floating rate securities, understanding the direction of interest rates can help investors anticipate potential returns and risks associated with these funds.
Investment Objective
Clarify your investment objectives. Are you seeking income generation with protection against rising interest rates? Ensure that the investment strategy and objectives of the floater fund align with your financial goals and risk tolerance.
Credit Quality
Evaluate the credit quality of the securities held by the floater mutual fund. While these funds typically invest in higher-quality floating rate securities, they still carry credit risk. Assess the credit ratings of the underlying bonds and the fund manager's approach to credit analysis and risk management.
Diversification
Consider the diversification strategy of the floater mutual fund. Diversification across issuers, industries, and sectors can help spread risk and reduce the impact of defaults on the portfolio. Review the fund's portfolio holdings and ensure that it is adequately diversified.
Performance History
Review the fund's performance history, considering both returns and volatility. Past performance is not indicative of future results, but it can provide insights into how the fund has performed under different market conditions. Look for consistency in performance and consider the fund's performance relative to its benchmark and peers.
Now that you have understood what is Floater mutual fund, you need to know how easily you can start your investment with INDmoney. Just follow these simple steps given below, to start your mutual fund investment journey with us.
Step 1
Download the INDmoney app and create your free investment account by completing your KYC ( Know Your Customer).
Step 2
Once your Free investment account is ready, you can either search for a Floater Mutual Fund or go to the mutual fund section and tap on Floater mutual funds.
Step 3
Choose a Floater Mutual Fund by looking at aspects like past returns, volatility, downside capture ratio, AUM, Expense ratios and underlying stocks and sectors.
Step 4
Step 5
Choose the amount that you want to invest as SIP or LumpSum.
Step 6
Set up payments. If you choose to set up SIP in Floater mutual funds, you can do a free automatic pay set up via bank mandate or UPI. If you choose to invest in lumpsum (one-time) then you can pay via UPI, netbanking, NEFT or RTGS.
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