Choosing the right investment instrument for growing savings can be a daunting task for many investors. With multiple options available in the market, it is crucial to select a scheme that aligns with your financial goals, risk appetite, and investment horizon. Two popular investment avenues that offer higher returns compared to traditional savings options are Floater Funds and Fixed Deposits (FDs).
What are Floater Funds?
Floater Funds, also known as Floating Rate Funds, are a variant of debt mutual funds. These funds predominantly invest in bonds and debt securities with variable interest rates. The interest rates of these instruments can fluctuate depending on market conditions.
Advantages of Floater Funds
– Higher returns: Floater Funds offer higher returns when interest rates rise, giving them an advantage over Fixed Deposits where interest rates are fixed.
– Liquidity: Floater Funds provide easier access to invested funds compared to FDs, which may have penalties for premature withdrawals.
– Diversified portfolio: Floater Funds typically invest in a variety of debt instruments, helping to mitigate risk and potentially generate higher returns.
Disadvantages of Floater Funds
– Lower interest rate: The variable interest rates of debt instruments in Floater Funds can decrease over time, affecting overall returns.
– Lack of safety of investment: There is a risk of losing your investment if the issuer defaults on its obligations regarding your invested funds and the accrued interest.
– Lack of predictability: The variable nature of interest rates makes it challenging to predict returns accurately, making investment decisions more difficult. Market volatilities and policy decisions can significantly impact the performance of floater funds in the long run.
What are Fixed Deposits (FDs)?
Fixed Deposits, or FDs, are traditional investment options offered by banks and non-banking financial institutions. FDs are preferred by investors seeking stable returns. The interest rates for FDs are fixed and can be earned on a monthly, quarterly, half-yearly, or yearly basis, depending on the tenure of investment.
Advantages of FDs
– Assured returns: The fixed interest rate ensures that the bank or NBFC must credit the interest accrued within the chosen time frame, regardless of any interest rate fluctuations.
– Secured investment: FDs offered by reputable banks are considered secure investment avenues with negligible risk compared to other savings instruments.
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Disadvantages of FDs
– Liquidity issue: Withdrawing funds from an FD before the lock-in period incurs a penalty, making it less flexible compared to Floater Funds.
– Lower returns: FDs offer lower interest rates compared to Floater Funds, which involve higher risk but the potential for appealing returns.
– No diversification of portfolio: FDs do not invest in diversified instruments like Floater Funds, limiting the potential for higher returns.
Floater Fund vs Fixed Deposits: Which will give higher returns?
If you are willing to tolerate some level of risk and are looking for potentially higher returns, Floater Funds may be a suitable choice. However, it is important to note that Floater Funds are subject to market volatility and could yield lower returns. On the other hand, FDs provide a safe and stable source of income with a fixed interest rate, making them favorable for conservative investors.
It is crucial to carefully evaluate your financial needs and risk tolerance before making a decision. Historical performance has shown that Floater Funds have generated higher returns compared to FDs. However, past performance does not guarantee future returns, as market sentiments significantly impact investment outcomes.
Source:
– Investopedia: https://www.investopedia.com/financial-edge/0410/the-basics-of-floating-rate-funds.aspx
– ICICI Bank: https://www.icicibank.com/Personal-Banking/investments/fixed-deposit/fixed-deposit.page