How floater funds help in avoiding interest rate changes affecting your investment

By: |
August 10, 2021 7:54 PM

Some of the advantages of investing in floater funds are higher returns, as the returns offered by floater funds are higher as compared to other fixed-income investments such as bank FDs and bonds.

Since the onset of the Covid pandemic, the debt platform has raised funds from reputed international investors including USDFC, ADB, FMO and Calvert Impact Capital.Since the onset of the Covid pandemic, the debt platform has raised funds from reputed international investors including USDFC, ADB, FMO and Calvert Impact Capital.

To revive the economy, interest rates are maintained low for a while. Fixed-income and debt investments are also offering lower returns. However, experts say this situation will not last and the Reserve Bank of India (RBI) may increase interest rates in the future with sufficient liquidity in the economy.

To get the best of this situation, industry experts say investors should look at investments whose returns are tied with interest rate movements – floater funds. Floater funds usually do well when the interest rates are about to rise, as the securities readjust their yields on par with prevailing interest rates. The returns of floater funds rise when interest rates rise, while returns drop when interest rates fall. They are debt funds that invest a minimum of 65 per cent of their assets in floating-rate securities.

Having said so, there are only a few floating rate securities, and the portfolio can be concentrated towards a particular set of assets. Experts say floater funds may buy fixed-rate bonds and implement overnight index swap (OIS) to hedge against interest rate risk, as there is a limited supply of floating-rate assets. Some of the top-performing floater funds according to Morningstar rating are HDFC Floating Rate Debt Fund, Nippon India Floating Rate Fund, ICICI Prudential Floating Interest Rate Fund.

Some of the advantages of investing in floater funds are higher returns, as the returns offered by floater funds are higher as compared to other fixed-income investments such as bank FDs and bonds. Additionally, experts say these funds are less volatile as compared to other debt funds. Investors stay up to date with interest rate movements, as the underlying securities readjust their interest rates in line with the prevailing interest rate in the economy.

Floater funds are also tax-efficient for those in higher tax brackets. Floater funds are debt funds, and long-term capital gains are taxed at 20 per cent after indexation, which is beneficial for those in higher tax brackets.

Here are some factors to consider before investing in floater funds;

  • Get track record: Floater funds are relatively new, hence, there is not much data available to analyse the performance during various market phases. Get the help of financial planners before investing.
  • They are volatile: As the returns offered by these funds are tied with the prevailing interest rates in the economy, these funds are volatile. Hence, their performance fluctuates and can vary from time to time.
  • Portfolio: The portfolio of a floater fund can be concentrated towards a few assets, which experts say increases concentration risk, as there are not many floater securities available in the market. Hence, try to pick a fund with a diversified portfolio.

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