What are Floating Rate Mutual Funds in India?
Debt mutual funds provide stable and high returns compared to bank Fixed deposits. However in the short term they may or may not perform well. Here comes another category of mutual funds called Floating rate mutual funds. These are better compared to short term mutual funds. This article is based on request from Shiv Anand to write about Floating rate mutual funds in India. In this article, I would tell you why should we invest in such mutual funds and under what circumstances you can benefit more from these mutual funds.
What are floating rate mutual funds?
Floating rate mutual funds are those which invests the majority of up to 75% in floating rate securities issued by banks, bonds and company debt securities. The rest would be invested in secured debt instruments. Unlike the debt mutual funds, these floating rate mutual funds do not react to changes in interest rates. While bonds issued by the Government of India has fixed coupon rate, floating rate securities have variable interest rates. These floating rate interest increase or decrease based on reference rate.
Why should you invest in floating rate mutual funds?
- These are less volatile than debt mutual funds
- They provide consistent returns over various economic cycles
- Maturity does not matter as they are invested in floating rate instruments that have a variable coupon rate.
When should you invest in floating rate mutual funds?
- When interest rates are expected to rise, investing in such floating rate mutual funds would benefit you.
- If you want to invest for short term, instead of investing in debt funds, investing in floating rate mutual funds would fetch you higher returns.
How to select floating rate mutual funds?
- You can consider some of these parameters while selecting these funds.
- Consider less expense ratio funds
- Good performance in 1, 2 and 3 years period
- Invest in funds which invests in high credit rating companies
- Assets under management (AUM) > Rs 100 Crores
Some of the top funds in that category
Here are some of the top mutual funds in this category.
Conclusion: In case you are looking for short term investment of 1-2 years, you should consider these floating rate fund as one of the best investment options.
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Floating rate mutual funds in India