Should you opt for floater funds?

Debt Funds are a conservative investor’s delight. They have two important factors – safety and stability which many investors look out for while investing their hard-earned money. There are 16 variants of these schemes which helps investors choose a scheme as per their needs and financial goals. In this article, we will talk about a relatively unknown debt scheme – Floater Funds.

Portfolio composition of Floater Funds

SEBI defines Floater Funds as open-ended debt mutual funds which predominantly invest in floating-rate instruments. Minimum 65% of the total assets are invested in bonds or instruments with variable rates. Fund houses can allocate the balance funds towards fixed-income generating instruments. 

Floater Fund schemes seek to capitalize on the interest rate fluctuations and generate superior returns for the investors. The key difference between these funds and other debt funds is that while other debt funds have a specific interest rate (coupon rate), floater funds have a variable interest rate. The rate for floater funds changes in relation to the market interest rate.

Key characteristics of floater funds

Risk

A floater fund is characterized as a scheme with limited risk. The high concentration of good quality debt instruments helps to mitigate (or at least minimize) the investment risk.

  1. Investment Tenure

There are two types of floater funds:

  • Short-Term

These floater funds invest majorly in short-term, highly liquid debt instruments. For instance, treasury bills, government securities, etc. The tenure of these funds tends to be below one year.

  • Long-Term

Long-term floater funds usually invest in debt funds for the long term duration such as corporate bonds, debentures, etc.

  1. Returns

Floater Fund investments have the potential to generate superior returns than other debt funds for the long term. While the principal investment remains secure, the market fluctuations help in generating higher returns. Especially in a rising market, these funds become a lucrative investment alternative.

  1. Taxation

Gains from floater fund investments are taxed as long-term capital gains when the floater fund investments are held for a minimum period of three years. Long-term capital gains tax rate is 20% after taking into consideration the indexation benefits. Short-term capital gains (if the holding period is less than three years) is added to your overall income and taxed as per the applicable income tax slabs.

Impact of interest rate fluctuations on floater fund investments

The ROI of floater funds depends heavily on fluctuations in market interest rates. One of the main causes of rate fluctuations is the changes made in the Repo Rate. Repo Rate is the rate at which RBI lends money to financial institutions such as the public sector and commercial banks. When RBI increases the Repo Rate, it leads to a rise in the returns generated by government bonds and other such zero risk instruments. This, in turn, increases the yield of debt funds for the long term which invest in such instruments including floater funds.

Is floater funds risk-free?

Contrary to popular belief, floater fund investments are not devoid of all risks. While it is true that they are less risky (when compared to pure equity funds), they are not zero risk investment options. In fact, no floater fund investment can be completely risk-free. If you want to invest in floater funds, you should analyze the securities held by the fund to determine the quality of the portfolio. Higher is the quality of the securities, lesser is the risk for your floater fund investment. 

Top-performing floater funds in India

Here is a list of the best floater funds available in India:

  1. ICICI Prudential Floating Interest Fund
  2. Aditya Birla Sun Life Floating Rate Fund
  3. Nippon India Floating Rate Fund
  4. HDFC Floating Rate Debt Fund
  5. Franklin India Floating Rate Fund
  6. UTI Floater Fund

Final Words

Floater Funds are a good choice for investors who have low to limited risk appetite. They are a stable alternative with the potential to generate good returns. So if you are someone who was shying away from the world of mutual funds because of the risks, you can give these schemes a shot.

Published by Nidhi Mehra

I am blogger with 5 years of experience in writing articles and topics related to finance and funds

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