Floater funds are a class of debt mutual funds that allocate 65% of their portfolio to varying-interest debt securities such as corporate bonds, certificates of deposits, and treasury bills. Their returns are inherently linked to market interest rate fluctuations. These funds aim to provide consistent income to investors. They are ideal for risk-averse individuals seeking to invest in low-risk debt securities.
Content:
- Floater Fund Meaning
- Floater Funds – Features
- Floater Funds – Advantages
- Floater Funds – Limitations
- Floater Funds – Quick Summary
- Floater Funds – Frequently Asked Questions
Floater Fund Meaning
A floater fund primarily consists of debt securities such as corporate bonds, certificates of deposits, treasury bills, etc., offering returns that fluctuate based on market changes or benchmark indices. This allows investors to take advantage of fluctuations in the business cycle.
The interest rate of a floater fund is influenced by the prevailing floating rates in the market, with changes in the Repo Rate set by the RBI directly impacting the interest rate of these funds. When the Repo Rate increases, the interest rate on floater funds also increases, making it favorable to invest in them during a period of increasing interest rates. However, when the repo rate decreases, the interest rate on the floater fund decreases.
Floater Funds – Features
The most important feature of a floater is that these funds allocate over 65% of their portfolio to debt instruments, with the intention of capitalizing on interest rate fluctuations to achieve higher returns. These funds typically generate annual returns from 7% to 9%.
The other features of floater funds are given below:
- Diversified Portfolio
Floating rate funds maintain a balanced portfolio of diverse instruments with fluctuating interest rates, offering prospective gains during beneficial interest rate cycles. Concurrently, they invest in fixed-interest securities, providing a steady income. This structure allows for potentially lucrative returns over the long term.
- Fluctuating Returns
The returns generated by floater funds are influenced by changes in interest rates. As interest rates fluctuate, the returns on the underlying debt instruments also change, which can lead to varying returns for investors.
- High Returns
Floater funds have the potential to generate higher returns in the long term compared to fixed deposits and other debt instruments. Investors can use rising interest rates in the debt market to earn higher returns through investments in these funds.
- Risk Mitigation
Floater funds are considered relatively low-risk investment options compared to equity instruments. However, there is still a credit risk associated with these funds, so investors should do proper research and choose securities with high credit ratings.
- Taxation
Floating rate funds are taxed similarly to debt mutual funds as they invest 65% of their assets in debt instruments. Short-term capital gains tax applies if the investment is held for less than three years. On the other hand, long-term capital gains tax applies for investments held for more than three years.
Floater Funds – Advantages
The main advantage of a floater fund is that this fund is comparatively less risky than equity instruments. Hence, this fund is suitable for individuals with lower risk tolerance. Also, these funds prioritize the security of the principal investment and offer the potential for higher returns when there are fluctuations in market interest rates.
The other features of floater funds are given below:
- Liquidity
Most floater funds are open-ended, allowing investors to buy or sell units anytime. This provides liquidity and flexibility, as investors can easily enter or exit their investments based on their financial needs.
- Principal Preservation
Floater funds focus on preserving the principal amount invested by investing in debt securities, generally considered less volatile, and have high credit ratings. These funds aim to safeguard the principal component of the investment.
- Income Generation
Floater funds can be a suitable investment option for individuals seeking regular income. The variable interest rates on the underlying debt instruments can generate a steady income stream, making them attractive for income-oriented investors.
- Volatility
Floater funds are comparatively less volatile than debt mutual funds. Hence, it is suitable for investors having a low-risk appetite.
Floater Funds – Limitations
The main limitation of a floater fund is that these funds are highly volatile compared to fixed-income funds, and their performance is determined by the prevailing market conditions.
The other limitations of floater funds are given below:
- Interest Rate Dependency
Floater funds are influenced by changes in interest rates. The performance of these funds is closely linked to the prevailing interest rate environment. If interest rates remain stable or decline, the returns from floater funds may be relatively lower than other investment options.
- Market Risk
Like any investment in debt instruments, floater funds are subject to market risk. Changes in market conditions, credit ratings of underlying securities, or economic factors can impact the value and returns of floater funds.
- Liquidity Risk
Some floater funds may invest in relatively illiquid debt securities, which can create liquidity risks. During market stress or low liquidity, it may be challenging to sell or redeem units of these funds.
- Credit Risk
Floater funds may invest in debt instruments with different credit ratings. Lower-rated securities carry a higher credit risk, which can impact the fund’s overall performance. Investors should carefully assess the credit quality and risk profile of the underlying securities in the fund’s portfolio.
- Uncertain Returns
Floater funds aim to provide higher returns during periods of rising interest rates. However, the returns cannot be predicted in advance. The performance of floater funds depends on various factors, including interest rate movements, credit quality, and market conditions.
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Floater Funds – Quick Summary
- Floater funds are a type of debt mutual fund that invests 65% of its assets in bonds and other debt securities such as corporate bonds, certificates of deposits, treasury bills, etc.
- Floater funds are debt mutual funds that invest in debt instruments with floating interest rates.
- The main feature of floater funds is that they have the potential to generate higher returns in the long term compared to fixed deposits and other debt instruments.
- The main advantage of a floater fund is that this fund is comparatively less risky than equity instruments. Hence, this fund is suitable for individuals with lower risk tolerance.
- The main limitation of a floater fund is that these funds are highly volatile compared to fixed-income funds, and their performance is contingent upon the prevailing market conditions.
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Floater Funds – Frequently Asked Questions
1. What Are Floater Funds?
Floater funds are mutual funds that invest 65% of their capital in debt securities with variable interest rates. The returns on floater funds are determined by economic change and market conditions.
2. What Is An Example Of A Floating Fund?
The ICICI Prudential Floating Interest Fund – Direct Plan (Growth) is a mutual fund scheme offered by ICICI Prudential Mutual Fund. It primarily invests in floating-rate debt instruments, aiming to provide investors with returns linked to market interest rate fluctuations.
3. What Is The Difference Between Floater Fund And Liquid Fund?
The main difference between a floater fund and a liquid fund is that a floater fund invests 60 to 100% of its money in debt securities with floating interest rates. In contrast, a liquid fund invests in short-term debt securities with fixed interest rates, such as bank deposits and commercial papers.
4. What Is The Minimum Investment In Floater Fund?
Generally, the minimum SIP investment in a floater fund is Rs. 1000. On the other hand, if you choose to invest a lump sum amount, you can invest from Rs. 5,000.
5. Which is better floating rate or fixed rate?
In general, floating rates are preferred in a falling interest rate environment, while fixed rates are suitable in a rising interest rate scenario. However, it is advisable to consider various factors such as market conditions, risk appetite, and interest rates.
6. Are floating rate funds a good investment?
Floating rate funds can be a good investment option in a rising interest rate environment as they offer protection against increasing rates and the potential for higher returns. However, adding floater funds to your portfolio can be risky.
