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Floater Fund

A floater fund majorly comprises debt securities that provide a varying rate of returns depending on market fluctuations or benchmark indices. Hence, investors can benefit from fluctuations in the business cycle, as they significantly affect the returns generated by standard stock market instruments.

Such mutual funds aim to mitigate the risk factor by primarily investing in debt tools such as corporate bonds, treasury bills, certificates of deposit, etc., as they pose a liability to issuing entities.

List of Floater Funds

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What are Floater Funds?

Debt mutual funds that invest in floating-rate debt securities are known as floater funds. They often invest in corporate bonds with fluctuating interest rates. Such funds put at least 65% of their money into floating-rate debt. 

Features of a Floater Fund

To understand the floater fund meaning better, here are its significant features-

  • Investment Portfolio

A floater fund primarily invests 65% of the entire corpus in fluctuating interest-bearing debt securities of various publicly listed companies as well as government securities.

  • Open Ended Schemes

Most floater funds are usually open-ended in nature, implying no restrictions regarding investments. Individuals willing to obtain NAV units of such mutual funds can do so at the trading value determined by the underlying assets' value at any time, in contrast to the constraints associated with closed-ended funds, which have to be traded within its NFO period.

  • Risks

This fund is associated with limited risks. While debt securities present in the corpus mitigate the risk substantially, the fluctuating market rate has a significant effect on the returns generated through such investment schemes.

  • Tenure

Floater debt funds can have either short-term or long-term maturity periods. Short-term debt mutual funds primarily invest in government securities having a tenure of less than one year (such as treasury bills, certificates of deposit, etc.). Long-term funds mostly comprise corporate bonds, government bonds, and debentures in their portfolio.

Such flexibility in the tenure of investment makes floater debt funds appealing to any class of investors in the market.

How Does Floater Fund Work?

Open-ended debt funds that invest in floating-rate instruments are known as floater funds. Fixed-rate instruments that have been modified to floating rate exposures are among these instruments. These instruments' interest rates are reset on a regular basis based on interest rate movement. 

These funds invest in debt instruments with variable returns based on market movements or benchmark indexes. This can help investors profit from business cycle variations. 

How Should You Invest in a Floater Fund?

You can invest in these funds direclyt through AMC or via reliable platforms such as Groww. You have to simply download the application from the Play Store or App Store. Next, you have to complete the registration and KYC process. Once you have completed it, you can easily pick the mutual fund of your choice and begin investing.

Why Should You Invest in a Floater Fund?

Investing in a debt floater mutual fund provides the following benefits to individuals -

  • Low Risks

As these funds primarily choose among various debt instruments for their investment corpus, the risk associated with such tools is considerably low. Risk-averse individuals looking to secure the principal component can opt for such debt mutual funds.

A floater fund has less risk when compared to equity instruments, thereby posing as an ideal investment tool for individuals with a lower-risk aptitude.

  • Substantial Returns

While debt securities keep the principal component secure, high returns can be procured through market interest rate fluctuations. Investing in such tools during a rising market trend ensures substantial yield on investment through higher compounded interest generated on total deposits.

This allows individuals to benefit from stock market fluctuations through capital gains or periodic dividend yield pay-outs without assuming substantial risk (as present with equity investments).

Taxation Rules of Floater Fund

A floater mutual fund is subject to taxation on any short, or long-term capital gains realized in the event of the sale of securities. If the fund was held for less than three years, short-term capital gains tax (STCG) is levied based on the respective income tax slab of an individual. For example, if an individual's total income earned in one financial year (including the sale of NAV units of a floater fund) ranges between Rs.2.5 lakh - Rs.5 lakh, tax levy on such capital gains shall be at the rate of 10%.

Long-term capital gains, on the other hand, are levied for the resale of securities after holding the same for at least three years or more. Tax at 20% of total gains is charged on such profits after adjusting the gains for indexation.

Provision for indexation ensures individuals enjoy real-time gains from their total profits after taking into account the changes in the overall price level occurring from the time of purchase and time of sale.

FAQ

Q1. Are floater funds risky?

Since floater funds often invest in the debt of low-credit-quality borrowers, floater funds can be regarded as a riskier element of your portfolio. The majority of the funds' income will be used to compensate for credit risk. 

Q2. What is the investment portfolio of a floater fund?

These funds will invest at least 65% of their assets in floating-rate instruments, with the remainder invested in fixed-income securities. They can either be mutual funds or exchange-traded funds (ETFs). 

Q3. Who can invest in floater funds?

Floater mutual funds are suitable for investors who want their corpus unaffected, and their main aim is to dilute the risk factor.

The investors willing to make substantial gains through interest rate fluctuations can procure the NAV of such debt floater mutual funds, provided a proper prediction regarding upcoming interest rate trends can be derived through market analysis.

Q4. What is the limitation of floater funds?

The primary limitation of investing in a floater mutual fund is that returns generated by such funds are heavily dependent on prevailing market conditions. Changes in repo rates are undertaken at the discretion of the RBI, as per the current economic condition of the country. Consequently, returns generated by floater debt securities cannot be predicted beforehand, thereby enhancing the risk associated with such investments.

Q5. When to Invest in Floater Mutual Funds? 

The best time to invest in a debt floater mutual fund is during rising interest rates in a country. A contractionary monetary policy dictating a rise in the repo rates, which, in turn, raises other dependent rates, is often undertaken during times of persevering inflation rates in the country. Any surplus funds parked in such funds during such prevailing market trends will generate substantial returns on total investment.

Disclaimer - Mutual Fund investments are subject to market risks; read all scheme-related documents carefully.

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