Investor Education
Floater Funds – What are Floater Funds?, Features and Types
FLOATER FUNDS
WHAT ARE FLOATER FUNDS?
Most investors prefer debt-related instruments like bonds as they offer a fixed percentage of returns. They have a fixed rate of return and once the investment matures, the pre-fixed interest will be paid to the investors. But there are certainly other types of debt investments that have floating interest rates. This signifies that the returns are not pre-fixed but rely and depend on the changes their benchmark goes through.
These funds predominantly invest in debt instruments and more than 65% of their portfolio is entitled to it. It aims to benefit from the fluctuating interest rates so that it can make high returns for the investors. The annual returns from these funds typically range from 7 to 9 % per annum.
HOW DO FLOATER FUNDS WORK?
The floating investment alternatives that these funds invest in have their own benchmarks. The interest rate offered by the changes as per the fluctuations in the interest rate of their benchmarks. It is most often seen that as the interest rate goes up in the debt market, the returns of these funds also increases which results in more gains. Fixed-income alternatives such as bonds lag in such situations as they continue offering fixed interest rates. This is why a huge number of investors switch to floater funds when the interests are booming as they deliver higher returns when compared to fixed return mutual funds.
TYPES OF FLOATER FUNDS
1. Long term floater funds:
These funds predominantly invest in debt securities with long-term maturity tenure. A major portion contains floating rate debt alternatives and the remaining is invested in either money market instruments or fixed-rate alternatives.
2. Short term floater funds:
These funds invest majorly in debt securities with short-term maturity tenure and high liquidity such as CoD, government securities, Treasury Bills among others.
FEATURES OF FLOATER FUNDS
1. Open-ended scheme:
Investors can opt for floater funds at any time of the year as per their feasibility, financial goals, and investment objectives. However, one has to go forward with lump sum investments a SIP is not permitted in floater funds.
2. Mixed portfolio:
Floater funds invest predominantly in floating rate instruments, which yield quality returns during favorable movements in interest rates. The rest of the assets pertains to fixed income securities. This diversification among debt securities heads towards better performance and better returns in the long investment horizon.
3. Taxation:
These funds are taxed just like any other mutual fund in the Debt category. For a holding period of fewer than 3 years, STCG is levied which is according to the tax slab of the individual and in case the holding period is more than 3 years, LTCG is levied which is 20% with the benefit of indexation.
4. Less risk:
Investment in these funds is ideal for risk-averse investors who want to gain quality returns but want a safe and secure investment option. Compared to equity mutual funds, floater funds are more safe avenues. However, Credit risk is still there which arises when the issuer of the bond defaults on its payment of dues.
WHO SHOULD INVEST IN FLOATER FUNDS?
Now that we have discussed a significant part about floater funds, it is time to discuss whether or not these funds are an ideal choice for you as an investor. It is recommended that risk-averse investors wanting to earn returns higher than other debt mutual funds should go forward with floater funds.
But investors must note that the returns from floater funds depend on the market conditions. The RBI is responsible for adjusting the repo rate as per the economic scenario and condition of the nation.
So, if the interest rate is falling, it is possible that these funds deliver lower returns than that of other mutual funds. However, these funds are not associated with a high level of risk.
TOP FLOATER FUNDS IN INDIA
- Aditya Birla Sun Life Floating Rate Fund
- HDFC Floating Rate Debt Wholesale Plan
- Nippon India Floating Rate Fund
- DSP Floater Fund
- ICICI Prudential Floating Interest Fund
- Kotak Floating Rate Fund
- SBI Floating Rate Debt Fund
- Tata Floating Rate Fund
FAQs
1. What are floater funds?
Floater funds are similar to debt mutual funds. They particularly invest in debt instruments and bonds that have a fluctuating or floating interest rate.
2. What are the two types of floater funds?
Two types of floater funds are long-term and short-term floater funds.
3. What are the key features of floater funds?
The key features of floater funds are that they are open-ended funds with low risk and high returns than the category average.
4. What are the top floater funds in India?
The top 3 floater funds are ABSL Floating rate fund, HDFC floating rate fund, and Nippon India Floating Rate Fund.