What is the Difference Between Fixed Rates and Floating Rates?

JAKARTADAILY.ID - Veteran and newbie investors alike need to understand the two types of rates in mutual funds: fixed rate and floating rate.

A mutual fund, or "reksa dana" in Indonesia, can be defined as a collective pool of investments managed by a fund manager from institutions or individual investors to be managed professionally. Its investment portfolio usually consists of securities such as stocks, bonds, money market instruments, or a combination of the three.

Meanwhile, a floating rate fund is a type of mutual fund that invests in securities with fluctuating interest rates, based on the benchmark rate. In Indonesia, it is BI 7-Day Reverse Repo Rate.

For example, if you are investing in a floating rate in the mortgage, your interest rates will fluctuate year-to-year, depending on the situation of the economy.

With floating rate funds, investors can optimize the flexibility of managing interest rates. Other main benefits from investing in this type of fund include diversified fixed income portfolios and lower duration risk compared to fixed-income securities with longer duration. Moreover, these funds are usually open-ended, giving investors a way to choose whether to enter or exit the fund as desired.

Unfortunately, a lot of floating rate funds have a high annual expense ratio. Redeeming the fund is also a bit more difficult, as it is only allowed at set periods.

Nevertheless, many experts recommend floating rate funds. Before investing in floating rate funds, make sure that the interest rates are low and have fallen quickly over a short period, but also expected to rise. If you're not a fan of low short-term rates and you'd like to maintain a portfolio that keeps up with inflation, then perhaps this type of fund is for you.

Also Read: What You Need to Know About Net Asset Value in Investment