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Floater Funds - Meaning, Features, Types & more

Typically, mutual fund investors who don't want to take any risk look at the debt funds as the safer avenues of investment. The field of debt funds has been resurrected after categorization and reclassification. Floater fund is one of the lesser-known mutual funds out of the debt fund basket.

What are Floater Funds

The floater fund is the fund that invests in variable or floating interest rate paying financial instruments. The key benefit of these funds is their lower degree of exposure to interest rate changes relative to the funds or instruments that provide a fixed rate of payment. These funds are attracting investors in an environment of rising interest rates.

How Floater Funds work

In contrast to other debt instruments, such as bonds with a fixed coupon rate, floating rate securities have variable interest rates. Each floating rate instrument has a specific benchmark in which the instrument's interest rate changes in line with the benchmark rate change. When the interest rate rises on the debt market, floater fund returns take a jump. Over the past 5 years, average floating returns have been 8.27 percent, making them a preferred choice for investors with decent returns looking for stable investment avenues.

Who can invest in Floater Funds

Floating rate funds appear to be an attractive option in their portfolio for risk-averse investors to add to the portion of fixed income. Such funds can hold many forms of floating debt instruments, including bonds and loans. The fund's strategies include credit quality and length. The rates payable on a floating rate instrument fluctuate in line with the defined level of interest rates, thus making these funds less prone to the risk of duration.

Features of Floater Funds

  • A mixed debt securities portfolio

    Floater funds invest most of their resources in floating rate instruments that yield quality returns during favorable movement of interest rates. The rest of the capital is allocated to shares with fixed income. This diversification of debt securities in the long investment cycle leads to better returns.
  • Less hazardous

    Floater Funds investment is ideal for investors who want to earn good returns but want a stable investment option. Floater funds are more secure investment avenue compared to equity investments. In the case of floater funds, however, there is also credit risk. This risk arises when the bond issuer fails to pay duties. That's why one should invest in floater funds in their investment portfolio that have high credit rating securities.
  • High Returns

    Floater Funds yield long-term high returns compared to other types of debt investment and fixed deposit from banks. These funds tend to be less volatile than other short-term debt funds. When interest rates are expected to rise in the debt market, the opportunity to earn high returns through investment in floater funds should be exploited.
  • Floater Funds Taxation Strategy

    Like any other debt mutual fund in India, floater funds are taxed. Short Term Capital Gains (STCG) is levied for a holding period of less than 3 years, which is based on the investor's income tax slab. If an investment has been held for more than 3 years, Long Term Capital Gains Tax will be levied, which currently stands at 20%, with the benefit of indexing.
  • Open-ended Scheme

    At any time of the year, investors can subscribe to floater funds according to their wishes, investment goals and financial goals. Nonetheless, one has to make a lump-sum investment since it is not allowed to invest in floater funds through Systematic Investment Plan (SIP).

Type of Floater Funds

  • Short-term floater funds

    These funds invest mainly in short-term and high liquidity debt securities such as T-Bills, deposit certificates, government securities, etc.
  • Long-term floater funds

    These funds are investing in long-term maturity debt securities. Most of these funds' investment portfolio consists of floating debt tools and the remainder is either invested in fixed-rate securities or money-market instruments.

Last Words

Investors must look at the securities held by the fund while evaluating a floating rate fund and should ensure their ability to tolerate risk. While these funds are less risky than equity funds, they are not risk-free investment. Such funds bear moderate risk, so when investing in these funds, investors should be mindful of this.

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