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Floater funds – What are they, Types, Features, Limitations, Taxation

  • Marisha Bhatt
  • Jan 12 2022
  • 7 minutes
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Debt mutual funds come in various types based on the instruments that they invest in. A variety in investment options means you have more choice of funds for your requirements, which may be parking your funds for a very short term like a day or two or for 3-5 years. Today let’s explore another kind of debt mutual fund – Floater funds.

What are floater funds and how do they work?

Floater funds are a type of debt mutual fund that invest in debt instruments having a floating rate of interest. The minimum investment under such funds is 65% of the fund assets in such floating rate instruments. The assets of these instruments can be corporate bonds or other similar assets that have a floating rate of interest and not a fixed rate of interest as in the case of Government bonds. 

The rate of interest of a floater fund is determined by the floating rates in the market. Any change in the Repo Rate offered by RBI impacts the floater funds. There is a direct relationship between the change in the Repo Rate and the interest rate of the floater funds. When the Repo rate increases, the interest rate on floater funds also increases and vice versa. Therefore, the best time to invest in these funds is when the interest rate in the country is on an increasing trend.

What are the types of floater funds?

There are primarily two types of floater funds available in the Indian market namely, short-term floater funds and long-term floater funds. The details of the same are mentioned below. 

Short term floater funds

Short-term floater funds invest in securities that have a relatively shorter maturity period. Some examples of such instruments are T-Bills, Commercial papers, etc.

Long term floater funds

These funds invest in debt securities that have a longer maturity horizon. Some examples of such debt instruments are Government securities or bonds, corporate bonds having a long-term maturity period, etc.  

What are the features and advantages of floaters funds?

Floater funds have several features and inherent advantages that benefit the investors and suit their investment objective. Some of such features and benefits are mentioned below.

  1. Reduced risks

As mentioned above, the risk involved in floater funds is considerably less as compared to equity funds. It is therefore a good investment option for risk-averse investors. Although these funds do carry a risk of default of the underlying securities, this risk can be mitigated by investing in better-rated funds or funds having high-rated securities.

  1. Scheme type

Most floater funds are open-ended schemes. This helps the investors to invest in the fund at any time as well as exit the fund when it no longer seems feasible to stay invested in the scheme. 

  1. Diversification

These funds require a minimum investment of 65% of the fund assets in the debt instruments having a floating rate of interest. The balance of the fund is invested in fixed-income securities. This helps the fund in yielding better returns and also mitigates the risk.

  1. Higher returns

Floater funds have the potential of earning better returns in the long run as compared to fixed interest funds. In an economy with increasing interest rates, these funds can be considered to be a safer and a better bet. 

What are the limitations of floater funds?

After discussing the features and the benefits of floater funds, let us discuss its limitations. These funds are highly volatile funds as compared to fixed income funds. Their performance is dependent on the prevailing market conditions. Any change in Repo Rate is directly reflected in these funds. Floater funds are considered to be a safer bet than most equity funds but the credit risk in these funds also has to be accounted for while making the investment decision. 

Hence, investors have to be cautious of their investment in floater funds and it is advisable if they limit their exposure to these funds by having a diversified portfolio. 

Who are the target investors for floater funds?

These funds belong to the debt mutual funds category and are essentially lower risk funds as compared to most equity funds. However, they do come with certain credit risks. The interest rate of floating funds is volatile based on any changes in the Repo rate announced by the RBI. This makes them riskier when compared to Fixed income funds. While these funds are still suitable to the risk averse investors as they belong to debt mutual funds, it should be noted that the investors have to be aware of the market risks. The risk of such funds can be considered to be under the moderate risk category and hence, an investor whose investment objective and risk profile matches the risk profile of the fund are advised to invest in these funds.

How are floater funds taxed?

As floater funds are part of the debt mutual funds category, their taxation is similar to the debt funds. These funds are subject to capital gain tax depending on the period of holding. The tax structure of these funds is tabled below.

Type of gainPeriod of holding Tax rate
Short term gainsLess than 36 monthsSlab rate of investor
Long term gains36 months and more20% (plus cess and surcharge) with indexation

Top floater funds to invest in

  • Nippon India Floating Rate 

The scheme seeks to fetch regular income for investors through investment focused on floating rate debt. It invests a maximum of 75% of its assets in fixed-rate debt securities that include fixed-rate securitised debt, money market instruments and floating rate debt instruments.

ParticularsDetails
Fund managerMs. Anju Chhajer
Launch date27th August 2004
Minimum investmentRs. 5,000
Expense ratio0.57%
RiskLow to Moderate risk

The returns provided by the fund as of 6th June 2021 are tabled below

Period6 months1 yr3 yrs5 yrsSince launch
Returns1.94%7.70%8.78%7.78%7.77%
  • Aditya Birla Sun Life Floating Rate 

The scheme seeks to fetch regular income through investment in a portfolio of floating-rate debt and money market instruments. It also invests a portion of the funds in fixed-rate debt securities and money market instruments.

ParticularsDetails
Fund managerMr. Harshil Survankar
Launch date23rd March 2009
Minimum investmentRs. 1,000
Expense ratio0.38%
RiskLow to Moderate risk

The returns provided by the fund as of 6th June 2021 are tabled below

Period6 months1 yr3 yrs5 yrsSince launch
Returns1.85%6.24%7.88%7.74%8.44%

Conclusion

Floater funds are a relatively riskier option under debt mutual funds. Investors have to ensure that the risk involved in investing in such funds is lower than the gains that can be generated by such funds to make a sound investment decision. Also, the investor should ensure that the investment horizon of the investor is in line with that of the tenure of the fund securities. These funds can be kept as a smaller portion of the investment portfolio to ensure that the exposure of the investor is limited.

FAQs

Does floater fund invest in fixed income securities too?

Yes. Floater funds predominantly (minimum 65%) invest in floating rate securities. The balance fund is invested in fixed income securities.

What is the best time to invest in floater funds?

The best time to invest in floter funds is when the interest rate in the country is on an increasing trend.

Does the investor have the option to invest in SIP mode under floater funds?

No. Floater funds require lumpsum investment. The option to invest through SIPs is not available in the case of floater funds.

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