In the past few months, with the Reserve Bank of India (RBI) hiking key rates to tame inflation, floating rate mutual funds are back in the reckoning. Floating funds caught the fancy of investors in 2021, too, when they collected more money in the first five months than in the entire of 2020. So, what exactly is a floating rate fund, and does it make sense to invest business money in it now? Let’s find out.
What is a Floating Rate Fund?
A floating rate fund is a debt mutual fund that invests in securities offering fluctuating interest rates. As per SEBI, these funds must have 65% or more of their portfolio in floating rate debt instruments. Floating rate funds comprise floating rate bonds whose interest rates are tied to an external benchmark such as a 3-month Treasury Bills, repo rate, Government securities yield, etc.
Let’s say you invest in a floating rate fund whose bonds are benchmarked against the repo rate. If the repo rate is hiked by say 0.5% from the current 6.25% to 6.75%, then you will get a higher return from your investment in the floating rate fund. However, if interest rates go down and the rate is decreased by 0.5%, then your returns too would go down.
Note that when interest rates go up, there can be adverse consequences on the performance of other debt funds. However, the case is different for floating funds. They can benefit from an increasing interest rate because the securities they invest keep fluctuating as per the existing interest rates.
For instance, if you have invested in a floating rate fund and interest rates go up from 6% to 6.5%, then you can earn more returns from your investments.
Benefits of Investing in Floating Rate Funds
- Helps You Make the Most of a Rising Interest Rate Regime
In a rising interest rate regime, which is the case now with the RBI hiking rates cumulative by 190 basis points since April 2022, floating rate funds can augment your profits. Business money investment in this fund when interest rates move north can help you get higher returns than fixed-return instruments. However, as said earlier, the same can bring down returns when interest rates are down.
- Helps You Diversify Your Fixed Income Portfolio
Investing in a floating rate fund helps you diversify your fixed-income portfolio. As the fund invests in different kinds of debt securities with variable interest rates, the same brings down overall portfolio risks significantly.
- Offers Flexibility
Flexibility in terms of entry and exit is vital to any investment. Floating rate mutual funds are open-ended funds, which means you have complete flexibility in terms of entry and exit.
As evident, investing in floating rate mutual funds can be a smart move in an interest rate upcycle. Allocating some component of your fixed-income portfolio to these funds can be a smart choice during these times.
If you have an investment horizon of 1-2 years, consider investing in a floating-rate fund. On the other hand, if your investment horizon is less than a year, liquid funds, ultra-short duration funds, and low-duration funds may be a better option.
The Final Word
If you seek to invest in the best floating rate mutual funds to bolster profits, Shootih is your go-to investment platform. With Shootih, you get real-time investment opportunities for your business’s idle cash and make the required investments within a single click. To book a demo call with our expert, click here.
Disclaimer: Mutual fund investments are subject to market risks, please read all scheme-related documents carefully
The content of this blog is not intended to serve any professional advice or guidance and Shootih takes no responsibility or liability in whatsoever manner for any investment decisions made by the readers of this blog or other blogs. Readers should seek independent professional advice before making any investment decision based on the information provided on this website.
