8 Things to Know About Investing in Floater Funds
It is always a good practice to invest only after you understand the nuances of the instruments thoroughly. Floater funds are a suitable means to diversify your portfolio but do you know what floater funds are? If not, read on to help you make an informed decision.
1.Meaning of floater funds:
Floater funds are a category of debt mutual funds that leverage the interest rate cycle to generate returns. The returns of floater funds are generally proportional to the interest rate fluctuations in the debt market.
2. Underlying instruments:
As per the SEBI mandate, floater funds are required to invest at least 65% of their funds into floating-rate instruments.
This essentially means that 65% of your investment will float along with the interest rate. If the interest rate moves up, your investment is likely to provide returns in correspondence with the higher interest rate. The remainder of the funds is parked in debt and money market instruments other than floating rate instruments.
3.Sensitivity to interest rates:
As indicated, floater funds generate returns in line with the interest rate. To illustrate this better, in case the RBI hikes the interest rates, fixed rate debt funds lose value. This happens because fixed rate instruments are bound to their lower original interest rates and tend to become less attractive to investors.
However, such an increase in interest rates works favourably for floater funds as they are invested in debt instruments which have floating interest rates. In a rising interest rate scenario, the interest rate of these funds also goes up making them a suitable option for investors.
4.Credit risk:
Floater funds come under the category of debt mutual funds and hence have a lower risk profile as compared to equity funds and hybrid funds. However, they still carry a different type of risk called credit risk. This risk is also termed the default risk. If the issuer of the underlying debt instruments fails to make payments as per schedule, the floater fund is likely to suffer a setback.
5.Taxability:
The taxability of floater funds is as mentioned below:
Type Duration of holding Tax rate
Short term capital gains Holding period of less than 36 months As per investor’s income tax slabs
Long term capital gains Holding period greater than 36 months 20% after indexation benefit (indexation is adjusting for inflation; by applying indexation, the purchase cost increases and the taxable income comes down)
6.Investment details:
Most floater funds are open-ended schemes which allow for investment throughout the year, there is no lock-in period applicable, and the funds invested can be withdrawn at any time. Depending on the fund house, minimum investment in floater funds may be as low as Rs. 500 for an initial purchase.
7.Suitability:
These funds may be suitable for investors who want to add some debt component to their portfolio but want to benefit from rising interest rates. They are also suitable for an individual who has a good understanding of the interest rate cycle. Typically, in a rising interest rate scenario these funds show potential for returns. On an overall basis, floater funds fall within the debt mutual fund category and hence, are less risky than equity funds. However, it is important to bear in mind that these funds are not entirely risk-free.
8.Investment Horizon:
Floater funds are a good option for a short term savings solution. Typically, one could look at these funds for needs arising over a 6 month to 3-year tenure. One can also consider investing in these funds with an intent of conducting a systematic transfer into equity funds.
This information might help you to have a better understanding of floater funds and enable you to decide if these are a suitable investment option for you. Remember, when selecting a mutual fund scheme, it helps to first be clear about your investment goals, risk appetite and investment horizon.
An investor education initiative.
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 & 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.
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