Floater funds may be used as a proxy to park your funds before they are systematically transferred into equity mutual funds. Have you ever wondered whether these floater funds themselves could be a viable asset class to consider for investing over the short to medium term? In this article, we understand the meaning of floater funds and the mechanism of how they could complement your portfolio.
What are floater funds?
A floater fund is a fund which invests in financial instruments with a debt orientation, they provide you with a variable or ‘floating interest rate’ and hence, the name. They invest in a range of debt instruments such as corporate bonds, T-bills, and certificates of deposits etc., the choice of investments would depend on the interest rate cycle and the corresponding business cycle.
Unlike other debt mutual funds such as bond funds, these instruments try to generate higher returns by leveraging the fluctuations in the interest rates. The returns from floater funds may change with the interest rates in the market. For example, in the event the interest rates in the debt market were to rise, floater funds may also see a corresponding increase in returns. There are numerous floater funds offered by various AMCs across India, giving investors the option to pick the right one for their needs.
Benefits of floater funds
By now it is quite apparent that floater funds are unlike other debt mutual funds such as bond funds which invest specifically in bonds and gilt funds which are focussed on debt instruments issued by the Government. Floater funds play a larger arena, let’s look at the key features here:
- Larger basket of debt instruments:
Floater funds look to invest in debt instruments which are aligned to floating interest rate design. During a favourable interest rate movement, they enable the fund to yield better than usual returns. A certain portion of the portfolio is dedicated to fixed–income securities, to ensure that the portfolio does not suffer from an unfavourable interest rate movement in the market.
Over the long haul, this diversified portfolio built by the floater funds could enable the fund to generate commensurate returns for the investors.
- Relatively less risky:
Debt mutual funds, in general, are aimed at investors with a comparatively lower risk appetite. Floater funds are relatively less risky than other categories of funds such as equity funds and hybrid mutual funds which offer exposure to the highly volatile equity markets.
It is imperative to understand that there is an element of credit risk in floater funds. This essentially means that there is a chance that the bond issuer may default on the payments.
- Alternative to conventional debt instruments:
Floater funds could provide better returns as compared to fixed interest rate debt instruments. If there is an expectation that interest rates are likely to rise, then investors might want to consider parking funds in this avenue to leverage the rising interest rate scenario. On the contrary, if the outlook for interest rates is gloomy, then one may choose to park in other debt mutual funds which have a fixed interest rate.
For short term capital gains (less than 36 month holding period), the tax is levied at the investor’s slab rates.
For long term capital gains, the tax is applicable at 20% with an indexation benefit (excluding applicable surcharge and cess). Indexation benefit is the mechanism of adjusting for inflation that helps reduce the tax liability.
There is so much more to floating rate funds than what is discussed here, but this should give you a fair idea about the category.
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Visit www.icicipruamc.com/note to know more about the process to complete a one-time Know Your Customer (KYC) requirement to invest in Mutual Funds. Investors should only deal with registered Mutual Funds, details of which can be verified on the SEBI website https://www.sebi.gov.in/intermediaries.html . For any queries, complaints and grievance redressal, investors may reach out to the AMCs and / or Investor Relations Officers. Additionally, investors may also lodge complaints on https://scores.gov.in if they are unsatisfied with the resolutions given by AMCs. SCORES portal facilitates you to lodge your complaint online with SEBI and subsequently view its status.
Mutual fund investments are subject to market risks, read all scheme related documents carefully.