- Meaning of floater fund
Floater funds are a category of debt mutual funds that take advantage of interest rate cycles to generate returns. The returns of floater funds are generally proportional to the interest rate fluctuations in the debt market.
- built-in tools
As per SEBI order, floater funds have to invest at least 65% of their funds in floating-rate instruments. This essentially means that 65% of your investment will be floating with an interest rate. If the interest rate rises, your investment is likely to yield a return corresponding to a higher interest rate. The balance amount is kept in debt and money market instruments apart from floating rate instruments.
- sensitivity to interest rates
As indicated, floater funds generate returns commensurate with the interest rate. To explain this better, if the RBI raises interest rates, the value of fixed rate debt funds goes down. This happens because fixed rate instruments tend to have lower principal interest rates and become less attractive to investors.
However, such an increase in interest rates works favorably for floater funds as they are invested in debt instruments that have floating interest rates. In a rising interest rate scenario, the interest rate of these funds also increases, making them a suitable option for investors.
- credit risk
Floater funds fall under the category of debt mutual funds and hence have a lower risk appetite as compared to equity funds and hybrid funds. However, they still carry a different type of risk called credit risk. This risk is also called default risk. If the issuer of the underlying debt instruments fails to make payments as per schedule, the floater fund is likely to suffer a setback.
- to be taxed
The taxability of floater funds is given below:
- investment statement
Most floater funds are open-ended schemes that allow investment throughout the year, no lock-in period is applicable, and the money invested can be withdrawn at any time. Depending on the fund house, the minimum investment in a floater fund can be as low as Rs 500 for an initial purchase.
- suitability
These funds may be suitable for investors who want to add some debt component to their portfolio but want to benefit from rising interest rates. They are also suitable for someone who has a good understanding of interest rate cycles. Typically, these funds show the potential for returns in a rising interest rate scenario. On an overall basis, floater funds fall under the debt mutual fund category and are, therefore, less risky than equity funds. However, it is important to note that these funds are not completely risk free. - investment horizon
Floater funds are a good option for a short term savings solution. Generally, one can look at these funds for the needs arising over a tenure of 6 months to 3 years. One can also consider investing in these funds with the intention of making systematic transfers to equity funds.
This information can help you have a better understanding of floater funds and enable you to decide whether these are a suitable investment option for you. Remember, while selecting a mutual fund scheme, it first helps to be clear about your investment goals, risk appetite and investment horizon.Disclaimer:-
An investor education initiative.
meeting www.icicipruamc.com/note To know more about the process of fulfilling the Know Your Customer (KYC) requirement for investing in mutual funds. Investors should deal only with registered mutual funds, details of which can be verified on SEBI website https://www.sebi.gov.in/intermediaries.html, For any queries, grievances and grievance redressal, investors may contact the AMC and/or Investor Relations Officers. In addition, investors can also file complaints on https://scores.gov.in If they are dissatisfied with the proposals made by the AMC. The SCORES portal allows you to register your complaint with SEBI online and view its status later.
Mutual fund investments are subject to market risks, read all the documents related to the scheme carefully.