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 thus, the name. Investors prefer debt instruments like bonds as they offer fixed returns. They invest in a range of debt instruments such as corporate bonds, T-bills, and certificates of deposits etc. But, there are other types of debt instruments that have floating interest rates. This means that the interest rate is not pre-fixed but depends on the changes their benchmark goes through. The choice of investments would depend on the interest rate cycle and the corresponding business cycle.
Differently from other debt mutual funds such as bond funds, these instruments try to generate higher returns by leveraging the fluctuations in the interest rates. These funds aim to benefit from the fluctuating interest rate so that they can generate higher returns for the investors. The returns from floater funds may change with the interest rates in the market. The annual returns from these funds could range from 7% to 9%. In the last 5-years, floater funds have delivered average returns of 8.27%.
The floating instruments that these funds invest in have their own benchmarks. 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. It is generally seen that as the interest rates increase in the debt market, the interest rate of these floating interest instruments rises too, and the floater funds deliver higher returns.
Some other things one should know about floater funds are as follows:
• If you’d like to invest in floater funds, you will have to make a lump sum investment as the Systematic Investment Plan option is not available in floater funds
• Floater funds are open-ended schemes allowing investments and withdrawals throughout the year
• For taxation, floater funds are treated as any other type of debt fund
Floater funds can be divided into two types:
• These funds invest in debt securities that have shorter maturities. You will see most such funds investing in high-liquidity instruments such as government securities, deposit certificates, and T-Bills, these are called short term floater funds.
• These funds are generally known to be more diversified with their portfolio composition. They invest in floating interest instruments along with considerable investments in the money market or fixed interest instruments, these are called long term floater funds.
It is risk-averse investors wanting to earn returns higher than mutual funds that offer fixed returns should invest in floater funds. The RBI is responsible for adjusting the repo rate as per the economic condition of the country. However, it becomes important to consider that the returns from floater funds depend on the market conditions. In a scenario where the interest rate falls, your floater fund investment could deliver returns lower than funds that offer fixed returns.