What are Floater Funds?
A mutual fund that allocates the majority of its assets in debt instruments with floating interest rates (floating rate instruments) are known as Floater Funds. These funds are categorized under debt mutual funds. They take advantage of the fluctuation in interest rates to generate quality returns for investors.
Floating rate securities have variable interest rates unlike other debt instruments such as bonds which have a fixed coupon rate. Every floating rate instrument has a specific benchmark, wherein the interest rate of the instrument changes in accordance to the change in its benchmark rate.
When the interest rate rises in the debt market, returns from floater funds take a jump. The average floating returns have been 8.27% in the past 5 years which makes them a preferred choice for investors looking for secure investment avenues with decent returns.
Asset Management Companies (AMC) in India offer numerous floater funds to investors for them to capitalize on the changing interest rates in the debt market.
Features of Floater Funds
- Mixed portfolio of debt securities
Floater funds invest the majority of their assets in floating rate instruments, which yield quality returns during favourable interest rate movement. Rest of the assets are allocated to fixed-income securities. This diversification among debt securities leads to better returns in the long investment horizon.
- Less Risky
Investment in Floater Funds is suitable for risk averse investors who want to earn quality returns but want a secure investment option. Compared to equity funds, floater funds are a more secure investment avenue. However, Credit risk is there in case of floater funds as well. This risk arises when the issuer of the bond defaults on its payment of dues. That is why one should invest in floater funds that have high credit rating securities in their investment portfolio.
- High Returns
Floater Funds yield high returns in the long run compared to other kinds of debt investments and bank fixed deposits. Unlike other short term debt funds, these funds tend to be less volatile. When interest rates in the debt market are expected to rise, one should leverage the opportunity to earn high returns via investment in floater funds.
- Taxation Policy on Floater Funds
Floater Funds are taxed just like any other debt mutual fund in India. For a holding period of less than 3 years, Short Term Capital Gains (STCG) is levied, which is according to the income tax slab of investors. If an investment is held for more than 3 years, Long Term Capital Gains Tax is levied, which currently stands at 20%, with the benefit of indexation.
- Open-ended scheme
Investors can take subscription of floater funds at any time of the year as per their needs, investment objectives and financial goals. However, one has to make a lump-sum investment since investment via Systematic Investment Plan (SIP) is not allowed in floater funds.
Types of Floater Funds
- Short-term floater funds
These funds invest predominantly in debt securities with short term maturities and high liquidity such as T-Bills, certificate of deposits, government securities, etc.
- Long-term floater funds
These funds invest in debt securities with long-term maturities. Major portion of the investment portfolio of these funds consists of floating rate debt instruments and the remaining is invested in either fixed rate securities or money-market instruments.
Who can invest in Floater Funds?
- Investors who are not willing to invest their funds at any level of risk may consider investing in floater funds since these funds invest a majority of their assets in debt securities
- Floater funds can be used for the purpose of diversification of portfolio with diluted risk. Investments in these funds will compensate for any high-risk investments in your portfolio
- Floater funds tend to provide substantial gains even during the times of significant fluctuations in the market. Therefore, the individuals willing to procure NAV of such debt floater funds after completely analysing the market may consider these funds as suitable investment options
Top 5 Floater Funds to Invest in India in 2020
Here is a list of floater funds in India which you can consider investing in 2020-
|Fund Name||AUM (Cr)||3-Year (%)||5-Year (%)|
|HDFC Floating Rate Debt Fund||9,799||7.47||7.95|
|Nippon India Floating Rate Fund||7,676||7.53||7.85|
|Aditya Birla Sun Life Floating Rate Fund||6,706||7.81||8.32|
|ICICI Prudential Floating Interest Fund||6,645||7.72||8.38|
|UTI Floater Fund||1,112||–||–|
*Data as on 13 April 2020, Source- Value Research
**The above funds have been listed on the basis of their increasing AUM and only direct plans have been included
FAQs on Floater Funds
Ques: What is a debt floater mutual fund?
Ans: Debt Floater Funds are mutual funds that invest in bonds which have a floating interest rate. If the interest rate for these funds increases, their bond prices decrease, thereby reducing the returns for the investors and vice versa.
Ques: What is a floating rate mutual fund?
Ans: A floating rate mutual fund is similar to a debt floater mutual fund. These funds invest in bonds and debt instruments that have a fluctuating/floating interest rate.
Ques: Are floating rate funds a good investment?
Ans: Floating rate investments are a good investment option for a portfolio that needs fixed income securities. A floater fund can hold investments in various instruments such as bonds and loans.
Ques: When should I invest in a floating rate fund?
Ans: You should consider investing in floating rate funds when the interest rates are rising in the country. Any investments made in debt floater funds during the times of preserving inflation rates in the economy will benefit the investors of these funds by generating substantial returns on total investment.