What are floater funds?
A floater fund is a fund that invests in financial instruments with a debt orientation, they offer you a variable or ‘floating interest rate’ and hence, the name. They invest in multiple debt instruments like corporate bonds, T-bills, and certificates of deposit etc. The investment choice will depend on the interest rate cycle and the respective business cycle.
Unlike other debt mutual funds such as bond funds, these instruments attempt to generate high returns by taking advantage of the fluctuations in interest rates. Returns from floater funds can change with the interest rates in the market. For example, if interest rates rise in the debt market, floater funds may also see a similar increase in returns. There are a number of floater funds offered by various AMCs across India, giving investors the option to choose the right one for their needs.
Benefits of floater funds
It is quite clear by now that floater funds are unlike other debt mutual funds like bond funds which invest exclusively in bonds and gilt funds which focus on debt instruments issued by the government. Floater funds play a huge sector, let’s look at the key features here:
- Large Basket of Debt Instruments:
Floater funds seek to invest in debt instruments that conform to the floating interest rate design. During a favorable interest rate movement, they enable the fund to deliver better than normal returns. A certain portion of the portfolio is devoted to fixed income securities, to ensure that the portfolio does not suffer from adverse interest rate movements in the market.Over the long term, this diversified portfolio created by a floater fund can enable the fund to generate similar returns for the investors.
- Relatively less risky:
Debt mutual funds, in general, are targeted towards investors with comparatively low risk. floater funds are relatively less risky As compared to other categories of funds like equity funds and hybrid mutual funds which offer investment in highly volatile equity markets.It is essential to understand that floater funds carry an element of credit risk. This essentially means that there is a chance that the bond issuer could default on payments.
- Alternatives to Traditional Debt Instruments:
Floater funds can give better returns as compared to fixed interest rate debt instruments. If interest rates are expected to rise, investors may want to consider parking funds in this avenue to take advantage of the rising interest rate scenario. Conversely, if the outlook for interest rates is disappointing, one can choose to invest in other debt mutual funds that have a fixed rate of interest. - to tax:
For short term capital gains (holding period less than 36 months), tax is levied at the slab rates of the investor.
For Long Term Capital Gains, the tax is applicable at 20% with indexation benefit (excluding applicable surcharges and cess). Indexation benefit is a mechanism of inflation adjustment which helps in reducing the tax liability.
There is a lot more to floating rate funds than what is discussed here, but this should give you a fair idea about the category.
Disclaimer:-
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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
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, 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
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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.