Floater Mutual Funds – Concept, Workings, Types, Features, Things to Remember & more

If you are also curious to know more about Floater mutual fund scheme, let’s get into this article and find out how it can result into a wonderful investment plan for you.

Nowadays, people Google about outstanding debt mutual fund plans that generate higher returns.

They want to park their money in the best MF plan that produces higher returns like equity funds and feel safe, like debt investment. 

Sounds a bit surprising, right? However, it is possible. There are some mind-blowing MF schemes available in the market that offers you this option.

And Floater Mutual Fund scheme is one of them. 

What are Floater Mutual Funds?

Floater Mutual Funds are popular funds that invest more than 65% of its total funds in debt instruments.

They are called Floater Mutual Funds since the instruments in which these funds invest comprise floating interest rates. This means varying interest rates. 

Often, investors identify these funds as a debt fund because, despite its unique characteristics, it is somewhat similar to debt mutual funds. 

Floater Mutual Fund is unique because these funds take the advantages of the changing interest rates. So, the fund managers can generate a good amount of interest from it.  

It makes these funds quite different from other debt fund investment plans.

For instance- unlike other debt funds that generate a fixed income by investing in debt instruments (e.g., bonds that usually give a fixed coupon rate to the investors). 

These Mutual Funds invest predominantly in debt instruments whose interest rates fluctuate with time. 

Every floating rate instrument mirrors a specific benchmark, which means if the interest rate of the benchmark instrument rises or drops, the floating rate instrument will perform in the same pattern. 

However, there is a positive relationship between returns from floater funds and debt market interest rate. 

For instance, if the market interest rate increases, these mutual fund will provide higher returns. 

Since, these funds don’t depend on debt instruments that generate fixed interest rate, so, many times; investors can either expect higher returns too.  

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How does Floater Mutual Funds work?

Floater Mutual Funds have become a more attractive investment plan as the interest rate in the market is continually rising.

For instance, if the repo-rate increases in a country, the market lending rate will automatically jump higher. 

This impact can raise the returns from specific debt instruments if they are linked with such markets. Investors will be enjoying higher returns. 

That’s why, whenever investors think that the market interest rate is steadily inclining or likely to rise, they switch to these funds. 

In this way, the Floater Mutual Fund offers you a higher return than other debt mutual fund plans. However, these funds are further split into two types about which we’ll discuss next. 

Find details of other Types of Funds here

Types of Floater Mutual Funds

Here are the various types of Floater Funds listed –

Short-term Floater Funds

Short-term floater funds predominantly invest in short-term debt instruments with a floating interest rate. 

For example- Government securities, Deposits, T-bills etc. These are indeed highly liquid instruments comprising a short maturity period. 

Long-Term Floater Funds

Unlike short-term Floater Funds, these funds invest in debt instruments for a long-term. These funds come with comparatively more extended maturity period. 

Every instrument in long-term floater funds is also influenced by the market interest rate. 

In this way, the fund manager picks this fund category to fulfil their client’s short term and long-term objective.

However, fund managers invest the remaining portion of ‘Floater Funds’ in either fixed-rate securities or money market instruments to build a robust portfolio.

Features of Floater Mutual Funds

Floater Mutual Funds are renowned for some of the highly-considerable features, which include:

Less Risk

Less risky nature of these mutual fund is the most seducing-factor for risk-averse investors. As compared to equity investments, the risk ratio is comparatively minimal in these funds. 

However, credit risk is a critical factor that needs to be considered before. Hence, make sure you pick a floater mutual fund with a higher credit rating. Else it can be a sign of loss. 

A Diversified Portfolio

Floater Mutual Funds predominantly invest in debt instruments with a fluctuating interest rate. If the market interest rate is favorable, the portfolio will yield attractive returns. 

The remaining funds are used to purchase fixed-income securities to adopt diversification strategy so that the portfolio keeps generating returns.

However, this strategy is helpful for a long-term horizon.  

Returns

Floater Funds can generate a higher return for investors on a long-run. This feature lacks other debt investments, but these funds come up with this special treat. 

These funds are also less volatile as compared to other short-term debt funds. Hence, one can expect higher returns from them. 

Taxation

Floater Mutual funds are noticed as a debt mutual fund scheme. That’s why these funds are taxable like debt mutual fund scheme. 

It displays a remarkable point of floater mutual fund scheme because if the fund is generating a higher return, the gains will be taxed like debt mutual funds. 

However, the tax ratio depends upon the time period. Currently, 20% tax is levied on long-term investments. But it should be held for more than three years. 

Open-ended debt scheme

Anytime, investors can enter in these mutual fund scheme as no restriction is imposed on investors. So invest in floater mutual funds as per your financial goals and investment plans. 

However, Floater Funds don’t offer you SIP (Systematic Investment Plan) option. Only lump-sum investments are acceptable.

Find details of all types of Debt Funds here

Who Should Invest in Floater Mutual Funds?

Floater Mutual funds are undoubtedly one of the best mutual fund plans. Investors who want to switch from debt options can find it a great alternative. 

Though these funds fall into debt funds category, still they can be highly profitable to the investors. Still, plenty of notions revolve around this mutual fund scheme. Is it the right choice for you? 

It is difficult to decide if you aren’t clear about your ultimate objective. Let’s talk about the things that you should note in these funds before taking the final action.  

Things to Remember before Investing in Floater Funds

Here are the few major points which any investor should go through before investing in Floater Funds –

• However, it is no surprise that risk-averse investors should enter these Mutual Fund schemes. As compared to ordinary debt instruments that generate a fixed-interest amount, these funds can be a way better option. The favourable market interest movements yield higher returns in these mutual funds. 
• The fund managers who handle these funds keep their eyes on RBI’s latest guidelines and economic condition. Eventually, if the RBI has imposed higher repo-rate, the market interest rate will rise. It creates opportunities for fund house managers to pick the debt-instruments linked to such markets. But, the opposite results can be driven. For instance, if the interest rate falls, these fund investment will underperform and might deliver you lower returns.
• Although, one thing that makes this Floater Mutual Fund scheme special is that, there is no higher risk associated with these funds. As compared to equity funds, they are less risky. Moreover, which instrument is riskier is a subject of uncertainty. 
• Remember one thing that this MF scheme doesn’t offer SIP plans; you will have to invest a lump sum amount in it. If you are looking for an investment plan that generates 7% to 9% p.a. returns. No wonder Floater mutual funds are the best options to go with.  

Check out all types of Hybrid Funds here                  

Limitation of Floater Mutual Funds

The primary thing that comes up as Floater Mutual Funds’ major shortcoming is that these funds solely depend upon the RBI’s next action. 

The repo-rate imposed by RBI is the deciding factor for the performance of these funds. 

Investors can earn higher returns in favorable conditions. Still, we can’t ignore another side of the coin. 

RBI does changes in the repo-rate to cope with market conditions. But whether the RBI will change the interest rate or not can’t be decided in advance. 

Hence, it is difficult to predict whether the portfolio will generate a higher return for the investors or not. 

That’s why this mutual fund scheme isn’t good for pure risk-averse investors because often it becomes a risky mutual fund scheme.

In an uncertain market condition, the performance of these mutual fund becomes hard to predict. 

However, these funds are less volatile as compared to equity funds. Still, the higher credit risk linked with these funds can’t be ignored. 

That’s why it is essential first to assess your risk-appetite because it can’t be the best choice for a pure risk-averse investor. 

Floater Mutual Funds – Conclusion

Floater mutual funds are decent-choice for investors who want to invest in a safe Debt Fund that provides them with a higher return. However, these funds don’t promise you higher returns for all time. 

Still, as compared to regular debt investment, you can generate a great amount from these funds. However, most people think that these funds are risk-free, which is a half-truth. 

These funds are prone to credit risk, and often they produce a lower return (lower than fixed-income instruments) due to some highly important factors. 

Yet, they are less risky as compared to equity funds. Also, you get a tax advantage in these funds. The gains on these Funds are taxed like debt funds.

Investors realize the benefit of this feature in Floater Funds when luckily portfolio generates higher returns. The ultimate decision is yours; take the wise step and achieve your goal!

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