Floater Mutual Funds

Floater mutual funds are suitable for low-risk, short-term investors who have a positive outlook on the interest rates. Find out how below.
Floater Mutual Funds
4 mins
14 Feb 2024

A floater mutual fund is a type of debt fund that invests in bonds and securities whose interest rates change according to the market conditions. Unlike fixed income funds, which offer a fixed rate of return, floater funds offer a variable rate of return that is linked to a benchmark rate, such as the repo rate, Mumbai Interbank Offer Rate (MIBOR) or London InterBank Overnight Rate (LIBOR).

Characteristics and functioning of floater funds

  • Floater funds are moderate-risk funds, as they are less affected by the changes in the interest rate scenario. They can protect the investors from the risk of capital erosion due to rising interest rates.
  • Floater funds are short-term funds, as they invest in securities with a low maturity period, usually less than one year. They can provide liquidity and stability to the investors who want to park their money for a short duration.
  • Floater funds are dynamic funds, as they adjust their portfolio according to the market movements. They can increase or decrease their exposure to floating rate securities depending on the interest rate outlook.
  • Floater funds are tax-efficient funds, as they are treated as debt funds for taxation purposes. They are subject to a short-term capital gains taxable as per the slab rate if held for less than three years, and a long-term capital gains tax of 20% with indexation if held for more than three years.
  • Floater funds are diversified funds, as they invest in a variety of securities, such as corporate bonds, government securities, commercial papers, certificates of deposit, and treasury bills. They can reduce the credit risk and default risk of the portfolio.

What are the types of floater funds?

There are two main types of floater funds, based on the proportion of floating rate securities in their portfolio:

  • Pure floater funds: These are the funds that invest at least 65% of their assets in floating rate securities. They offer the highest sensitivity to the interest rate changes and the highest potential returns among the floater funds.
  • Hybrid floater funds: These are the funds that invest less than 65% of their assets in floating rate securities, and the rest in fixed rate securities. They offer a lower sensitivity to the interest rate changes and a lower potential return than the pure floater funds, but a higher stability and diversification.

Who should invest in floater funds?

Floater funds are suitable for investors who:

  • Have a low risk appetite and want to avoid the volatility of the equity market.
  • Have a short-term investment horizon and want to earn a regular income from their investments.
  • Have a positive outlook on the interest rate scenario and expect the interest rates to rise in the future.
  • Want to optimize their tax liability and benefit from the indexation benefit of the long-term capital gains tax.

How to invest in floater funds?

Investing in floater funds is easy and convenient. You can follow these steps to invest in floater funds:

  • Choose a fund: You can choose a floater fund that matches your risk profile, investment objective, and time horizon. You can compare the performance, portfolio, expense ratio, and ratings of different floater funds on various online platforms.
  • Open an account: You can open an account with the fund house or an online platform that offers floater funds. You will need to provide your KYC details, such as PAN, Aadhaar, bank account, and address proof.
  • Make a payment: You can make a payment through various modes, such as net banking, UPI, debit card, or cheque. You can invest in floater funds either as a lump sum or as a systematic investment plan (SIP).
  • Get a confirmation: You will get a confirmation of your investment through email or SMS. You will also get a statement of your account that shows the units allotted, NAV, and value of your investment.

Advantages of floater mutual funds

Floater mutual funds offer several advantages to the investors, such as:

  • Protection from interest rate risk: Floater funds can shield the investors from the adverse impact of rising interest rates, as they offer a higher return when the interest rates go up.
  • Liquidity and flexibility: Floater funds can provide liquidity and flexibility to the investors, as they can be redeemed at any time without any exit load or penalty.
  • Regular income: Floater funds can provide a regular income to the investors, as they pay dividends on a monthly, quarterly, or annual basis, depending on the availability of surplus. Plus, it is available only for dividend plans.
  • Low cost: Floater funds have a low expense ratio, as they do not incur high transaction costs or management fees.

Limitations of floater funds

Floater funds also have some limitations that the investors should be aware of, such as:

  • Lower return than fixed income funds: Floater funds may offer a lower return than fixed income funds, especially when the interest rates are falling or stable.
  • Credit risk and default risk: Floater funds may face credit risk and default risk, if the issuers of the securities fail to pay the interest or principal amount on time.
  • Lack of awareness and availability: Floater funds are not very popular or widely available in the Indian market, as many investors are not aware of their features and benefits.

Frequently asked questions

What is the duration of a floater fund?

The duration of a floater fund is the weighted average time until the interest rates of the securities in the fund reset.

Is it a good time to invest in floating rate funds?

It may be a good time to invest in floating rate funds if you expect the interest rates to rise in the future.

What is the maturity of a floater fund?

The maturity of a floater fund is the weighted average time until the principal repayment of the securities in the fund.

Are floating rate funds risky?

Floating rate funds are risky in terms of credit risk and default risk, as they may invest in low-rated or unrated securities.

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