InvestorQ : What are floater funds and How can I avoid interest rate changes affecting my investment?
Nikita Damle made post

What are floater funds and How can I avoid interest rate changes affecting my investment?

natasha Samani answered.
12 months ago
If you look at the present situation, it is not too good for the investors. Interest rates are low in the economy, so fixed income and debt instruments offer a lower return. So, everybody wants to avoid a situation where their investment is affected by lower interest rates. Basically, they are looking for options to balance out their portfolio. Well, I have an option under which your investment will move in direction of the interest rates in the market. So, when the interest rates will increase, your investment return will increase, and vice-versa.

This investment option is called the floater fund. These funds are in the nature of debt funds that invest a minimum of 65% of their assets in floating securities. These funds perform well when the interest rates are about to move upwards, as the underlying securities adjust their yield at par with the interest rate prevailing in the market. So, returns would be high when interests are rising, and returns will be lower when they are falling.

However, just like every other fund, the major problem with these funds is that there are only a few floating rate securities, and the portfolio can only be concentrated on a particular set of assets.

Factors you should consider before investing:

Track record: These funds are new in the market, so investors have very less or no data available for analysis of their performance.

Portfolio constitution: There are not many securities available in the market, the portfolio of the floater fund can be concentrated towards a few assets, so the concentration risk increases. So, you will have to make the right choice.