Understanding Floater and Liquid Mutual Funds - IIFL



Understanding Floater and Liquid Mutual Funds

Written by Web Desk Team | Published :July 7, 2023 , 11:07 am IST

Mutual funds are investment vehicles that pool money from multiple investors to invest in a diversified portfolio of securities. They offer individuals an opportunity to participate in the financial markets with the guidance of professional fund managers.

Floater funds are a type of debt mutual fund that invests in floating-rate securities. These securities have variable interest rates, which means the interest payments adjust periodically based on a benchmark, such as the prevailing market interest rates.

Floater funds offer investors a potentially higher income compared to fixed-rate debt funds during periods of rising interest rates. They can provide stability to an investment portfolio, especially when interest rates are expected to increase. Moreover, they offer the potential for capital appreciation along with regular income.

While floater funds have their advantages, it’s important to consider certain factors. Since these funds invest in floating-rate securities, they may be subject to credit risk associated with the underlying borrowers. Additionally, the performance of floater funds can be influenced by changes in interest rates, so investors need to monitor market conditions and interest rate trends.

On the other hand, are liquid funds. Liquid funds are a category of debt mutual funds that primarily invest in short-term money market instruments with a maturity of up to 91 days. These instruments include Treasury Bills, Commercial Papers, and Certificates of Deposit.

The key feature of liquid funds is their high liquidity. Investors can typically redeem their investment at any time, usually within 24 hours, making them an attractive option for parking surplus funds or for short-term cash management.

Liquid funds offer several benefits, including easy access to funds, lower risk compared to longer-term debt funds, and potentially higher returns than traditional savings accounts. They are often utilized by investors to manage emergency funds, meet short-term financial goals, or temporarily park funds between investments.

While liquid funds are generally considered low-risk investments, it’s important to remember that they are not entirely risk-free. Investors should evaluate the credit quality of the underlying instruments and the track record of the fund house. Additionally, the returns from liquid funds are subject to market fluctuations and changes in interest rates.

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