Interest rate risk is one of the chief risks in debt funds. floater funds can be a suitable option for those looking to cope with interest rate fluctuations. These funds are also known as floating-rate funds.
Here in this guide, we will discuss various aspects of floater funds to help you decide if these funds are suitable for you. Keep reading!
What Are Floater Funds?
Floater funds are debt funds that primarily invest in debt securities with variable or floating interest rates.
This means the fund’s underlying securities do not promise fixed interest rates as interest rates are tied to a benchmark or reference rate (such as the repo rate), and hence they may change over time. For instance, if the benchmark rate goes up, the interest payments on the fund’s investments will increase and vice versa.
Floating rate funds are designed to provide investors with some degree of protection against interest rate fluctuations.
[Related: Debt Funds & Their Types]
Top Performing Floater Funds
Here is a list of best-performing floater funds based on the past 5-year performance. Note- This list does not consist of any recommendation or financial advice.
| Fund Name | 3-Year CAGR | 5-Year CAGR |
| ICICI Prudential Floating Rate Fund | 6.15% | 7.55% |
| Nippon India Floating Rate Fund | 5.36% | 7.50% |
| HDFC Floating Rate Fund | 5.76% | 7.10% |
| Kotak Floating Rate Fund | 5.54% | 6.79% |
| Franklin India Floating Rate Fund | 5.54% | 6.35% |
Features Of Floater Funds
Let’s discuss the features of floating rate funds that make them different from other debt funds.
1. Asset Allocation
At least 65% of the assets are invested in debt securities like government bonds, corporate bonds etc. that feature floating interest rates.
[ Also Know About – GILT Funds | Corporate Bond Funds ]
2. Tenure
Investors can invest for short-term and long-term in floating rate funds. Short-term and long-term floater funds use different strategies in selecting debt securities to optimize liquidity, risks and returns.
3. Liquidity
These funds are open-ended. So, they offer a good level of liquidity to investors. Investors can trade the units of the funds on any trading day.
Advantages Of Floater Funds
What advantages do floater funds offer? Let’s have a look.
A. Low Risk: Debt funds like floating rate funds carry lower risk than equity funds. This makes them a good choice for investors who have a low-risk appetite.
B. Decent Returns: Without risk, no one can get satisfying returns. If you are okay with taking some risk, you can earn higher returns than bank deposits by investing in floater funds.
Disadvantages Of Floater Funds
A comprehensive guide is incomplete if we do not discuss the disadvantages. Here are the disadvantages of floater funds.
A. Market Dependency: The returns of floater funds are highly dependent on market conditions and interest rate fluctuation. In this situation, predicting the net future returns is very tough. They may produce high returns in one sample period while below average in another.
B. Volatility: Generally, investors who are not immune to market volatility prefer investing in debt mutual funds but floater funds may show volatility due to interest rate fluctuations.
Important Points To Consider
Keeping these following points in mind may help you make informed investment decisions in floater funds.
- Consider your financial goals, plans and investment horizon.
- Compare different funds against the benchmark.
- Pay attention to the past performances of funds.
- Be aware of the expense ratio and exit loads.
- It may be prudent to steer clear of newly launched schemes.
[ This May Help: How To Choose A Mutual Fund ]
Final Words
The content provided is for informational purposes and readers should consult with a financial advisor or conduct their own research before making investment decisions.
FAQs
What is the repo rate?
The repo rate is the rate at which scheduled commercial and public sector banks procure loans from the RBI (Reserve Bank of India).
How are floater funds taxed?
Floater funds are debt mutual funds. So, these funds are taxed similarly to debt funds. Debt funds are now taxable under the applicable income tax slab for both short-term & long-term capital gains.
Do floater Funds have exit loads?
Most floater funds do not have any exit loads. However, you should always check this before investing in any scheme.
Can we invest in floater funds through SIPs?
Yes, mutual fund companies offer a SIP mode of investment for floater funds.
Are floater funds open-ended?
Yes, floating rate funds are open-ended. It means investors can buy or sell the units of floater funds at any time.
What are the steps to invest in floater funds?
Here are the steps:
1. Open an investment account with a reputed AMC or an online investment platform
2. Complete your KYC
3. Research and select a floating rate fund (floater fund)
4. Decide your investment amount & mode of investment
5. Make the payment
