Floater Fund vs Fixed Deposit: Know which offers higher return?

It could be a daunting task for many investors when it comes to choosing the right investment instrument for growing savings. There are multiple investment options available in the market and you should choose the appropriate scheme as per your financial goals, risk appetite and investment horizon. A few investment instruments offer higher return compared to traditional savings options.

Floater Funds and Fixed Deposits (FDs) are two such investment avenues you can consider to grow your savings. Floater Funds are one of the most popular investments that offer lucrative returns. On the other hand, Fixed Deposits ensure safety of investment along with appealing returns.

What are Floater Funds?

Floater Funds or Floating Rate Funds are a variant of debt mutual funds that predominantly invest in bonds and debt securities with variable interest rates. These changes in interest rates could be both favourable and unfavourable, depending on the market conditions.

Advantages of Floater Funds

Higher returns: Floating Rate Funds offer higher returns when the interest rates go up. Therefore, these funds have an advantage over Fixed Deposits that offer interests at a fixed rate.

Liquidity: While premature liquidation of FDs comes with penalties, Floater Funds provide easier access to the invested amount.

Diversified portfolio: Floater Funds generally invest in a series of debt instruments to mitigate risk and generate potentially higher returns.

Disadvantages of Floater Funds

Lower interest rate: Since the interest rates of debt instruments under Floating Rate Funds are variable, the rates can decrease over time and affect the overall returns.

Lack of safety of investment: If the issuer defaults on its obligations regarding your invested funds and interest accrued, there are chances of losing your investment.

Lack of predictability: Since interest rates are variable, one can't predict the return efficiently and this could impact their investment decisions. Moreover, in the long-run, the floater funds are more prone to market volatilities and any change in interest rates due to policy decisions.

What are Fixed Deposits (FDs)?

Fixed Deposits or FDs are one of the traditional investment options offered by most of the banks and NBFCs. Generally FDs are preferred by those investors who are looking for a stable return. The interest rates for FDs are fixed and can be earned on a monthly, quarterly, half-yearly or yearly basis. The interest rates on FDs depend on the tenure of investment.

Advantages of FDs

Assured Returns: Since the rate of interest is fixed, the bank or NBFC has to credit the interest accrued within the chosen time frame. Even if the interest rate fluctuates after you invest in an FD scheme, you can still get the returns at the predetermined interest rate.

Secured investment: FDs offered by most of the public and private sector banks are considered as secure investment avenues.  There is almost negligible risk associated with FD investments compared to other savings instruments.

Disadvantages of FDs

Liquidity issue: If you try withdrawing your investments before the lock-in period has ended, you need to pay a penalty. Therefore, liquidating an FD isn't as easy as a Floater Fund.

Lower Returns: Investing in a Floater Fund involves high risk and if the market conditions are favourable, you'll get appealing returns. However, FDs offer much lower interest rates.

No diversification of portfolio: Fixed Deposits don't invest your money into diversified investment instruments like a Floater Fund. Thus, it isn't possible to earn potentially higher returns.

Floater Fund vs Fixed Deposits: Which will give higher returns?

If you're looking for potentially higher returns and can tolerate some level of risk, Floater Funds could be a suitable choice. It's also important to note that they are subject to market volatility and you might end up having lower returns. On the other hand, if you want safety of investment, FDs provide a stable source of income with a fixed interest rate. They are particularly favoured by conservative investors.

However, since there's almost no risk involved and the investments aren't diversified, you'll not be able to enjoy lucrative returns as Floater Funds. Moreover, historical records have proven that Floater Funds have generated higher returns compared to FDs. But, the decision should be based on your financial needs and risk tolerance. Also, it's essential to note that positive historical performance doesn't guarantee substantial returns in the future as market sentiments significantly affect the return on investment.