risk-return profile
Proper valuation of any investment should be done before investing in the same. Here, we discuss the risks and returns associated with floater funds. Before doing so, we need to understand the specifics of these funds.
Floating Rate Fund – Definition and Characteristics:
Floating rate mutual funds are debt mutual funds that invest at least 65% of the underlying fund in debt securities with floating interest rates. The remaining amount can be invested in fixed income securities. The returns from these funds ‘float’ according to the interest rate cycle. If the interest rate cycle is increasing, floating rate funds can show a similar increase in returns.
Floater funds take advantage of interest rate cycles and aim to maximize their returns during a rising interest rate scenario. These funds are not devoid of risk factors, so we must understand the risk factors and invest in an informed manner.
Interest Rate and Returns:
The returns of floater funds are governed by the prevailing interest rates. If RBI raises interest rates, the returns from floating rate funds may also increase. Hence, increase in interest rates is a positive sign for floater funds. Conversely, other categories of debt funds such as bond funds, and gilt funds that have fixed income instruments as the underlying asset may lose value because their interest rates will not rise.
How should you choose a suitable floater fund?
The selection of floating rate funds can be guided by the following factors:
- credit risk
The credit quality of the underlying instruments is critical to the fund’s performance. While investing in floater funds, remember to check the credit quality of the underlying instruments. Investing in AAA and AA+ debt instruments can reduce credit risk.Credit risk refers to the default risk that may arise in the event of a default in payment by the bond issuer as per the schedule. The fund is likely to suffer an unprecedented setback in such events. This is one of the most prominent risks associated with debt instruments.
- investment period
Floating rate mutual funds can be suitable for investors with an investment horizon of 6 months – 3 years. It can also be a suitable way to park your emergency fund, especially during a rising interest rate scenario.
Based on the above considerations, you should now be able to invest in floater funds to generate potential returns with relatively low risk.
Disclaimer:-
An investor education initiative.
meeting www.icicipruamc.com/note To know more about the process of fulfilling the Know Your Customer (KYC) requirement for investing in mutual funds. Investors should deal only with registered mutual funds whose details can be verified SEBI Website https://www.sebi.gov.in/intermediaries.html, For any queries, grievances and grievance redressal, investors may contact the AMC and/or Investor Relations Officers. In addition, investors can also file complaints on https://scores.gov.in If they are dissatisfied with the proposals made by the AMC. The SCORES portal allows you to register your complaint with SEBI online and view its status later.
Mutual fund investments are subject to market risks, read all the documents related to the scheme carefully.