As we know, in today’s age how investing has become so popular and now smart investors like to invest in floater funds of mutual funds. The assets are managed under management (AUM) in this category.
In simple terms, a floating rate fund is a mutual fund that invests in financial instruments, like bonds and bank loans, paying a variable or floating interest rate. Mostly floating-rate funds invest in relative short-term commitments which means they have relatively lower duration than other fixed-income mutual funds.
In floater funds, you can invest at least 65% of their total assets in floating-rate instruments. Given the scarcity of floating-rate instruments in the Indian debt markets, these funds generally invest in fixed-coupon bonds and use derivative instruments such as interest rate swaps to convert the fixed-rate receivables into floating-rate.
Experts like Dhaval Kapadia, Director, Investment Advisory, Morningstar Investment Adviser (India), say that in the recent past, interest rates have moved lower across the yield curve to multi-year lows following sharp rate cuts and other measures taken by the Reserve Bank of India.
What are the Returns from funds?
The floating rate funds invest in AAA-rated instruments. On average, there are different category has offered 7.8% returns for one year, 8.48% for two years, and 8.19% for three years. In the current system, these funds below generate good returns in the near term.
Floater funds is a new type of investment in the market—there are only eight funds at present— and the AUM in this category is mostly dominated by corporates and HNIs, retail investors must understand the importance of default or credit risk. With increasing yields, the result of the returns on the shorter end of the curve is going to below.
And floater funds are highly sensitive towards interest rate and hence the returns will fluctuate as and when the interest rate changes.
This is the biggest advantage of floating funds that attract investors the most.