Several things cross your mind while investing in mutual funds. Some common dilemmas that you might face include investing in a lump sum or via a SIP, picking high-risk or low-risk funds, and deciding the investment horizon. Out of these, risk plays a crucial role in investing. Equities can offer high risk but also the most promising returns. On the other hand, debt mutual funds are suitable for risk-averse investors.
Among these categories lie further bifurcations too. This article talks about two types of debt mutual funds – floater funds and gilt funds. Find out what these are and how they differ from one another.
Differences between floater mutual funds and gilt mutual funds
| Points of difference | Floater mutual funds | Gilt mutual funds |
| Definition | Floater funds are a type of debt mutual fund. These funds invest a minimum of 65% of their assets in floating-rate bonds. | Gilt Funds are also a type of debt mutual fund. These funds invest in fixed interest securities and bonds that have been issued by the state and central governments. |
| Risk involved | Since a floater fund is primarily a debt mutual fund, the risk involved is comparatively low. However, there is some degree of risk involved because a fluctuating market rate can have an impact on the investment returns. | Compared to floater funds, gilt mutual funds offer even lower risk. These funds have no credit risk. This is chiefly because they invest in fixed interest securities issued by the government. So the chances of volatility are practically minimal.
But you should keep in mind that however unlikely it may seem, every investment does carry some risk. So, it is essential to be prudent while making investment decisions. |
| Returns generated | The returns from floater funds can depend on the interest rate fluctuations of the benchmark they follow. When interest rates increase in the debt market, the fund’s interest also shoots up. As a result, the returns generated are high.
As long as you are able to take advantage of the market fluctuations, you can procure high returns by investing in floater funds. |
Gilt funds can offer moderate to high returns. The returns from gilt mutual funds are linked to the repo rate that is set by the Reserve Bank of India (RBI). Since debt funds function inversely to equity funds, the return from gilt funds can be higher if the economy shows a downfall and equities take a hit. In some scenarios, gilt funds can also offer up to 12% returns, giving equity close competition. |
To sum it up
The decision to invest in either or both can be taken based on your risk appetite. Floater and gilt funds are debt funds, so they are nevertheless great for diversifying your portfolio and reducing the risk quotient. However, the percentage and the time of investment can truly determine your gains. So, make sure to time the market well and then make a call. If you wish to start investing in floater or gilt mutual funds, you can browse through the Tata Capital Moneyfy app and enjoy simplified investing features and services.