Floater Fund

Introduction

A floater fund capitalizes on interest rate fluctuations by investing in floating-rate debt securities, making it a type of debt mutual fund. This approach allows investors to potentially benefit from market variations while managing risk through a diversified portfolio of debt instruments.

What are Floater Funds?

Floater funds primarily invest in floating-rate debt securities, making them specialized debt mutual funds. These are instruments where the interest rates adjust periodically based on market conditions or benchmark indices. Typically, floater funds allocate at least 65% of their corpus to such floating-rate instruments, including corporate bonds and government securities.

Key Features of Floater Funds

1. Investment Composition: A Floater fund invests a minimum of 65% of its corpus in fluctuating interest-bearing debt securities. These can include a mix of government bonds, corporate bonds, and other debt instruments.
2. Fund Type: Most floater funds operate as open-ended schemes, allowing investors to buy or sell units based on the current Net Asset Value (NAV). This provides flexibility compared to closed-ended funds, which are only available for trading during their New Fund Offer (NFO) period.
3. Risk Profile: These funds generally offer lower risk compared to equity investments. Debt securities help mitigate risk, though market rate fluctuations can influence returns.
4. Investment Tenure: A Floater fund can be short-term or long-term. Short-term funds invest in securities with maturities of less than one year, while long-term funds include corporate bonds, government bonds, and debentures with extended maturities.

How Floater Funds Work

Floater funds invest in debt instruments that offer variable returns, which adjust according to interest rate movements. These instruments are typically reset periodically based on market rates or specific benchmark indices. The fund’s returns benefit from favorable market conditions, providing potential capital gains and income.

How to Invest in a Floater Fund

Investing in a floater fund is straightforward:

1. Direct Investment: You can invest directly through the Asset Management Company (AMC) offering the fund.
2. Investment Platforms: Use reliable investment platforms like Groww, which provide a user-friendly interface for selecting and investing in floater funds. Download the app from the Play Store or App Store, complete the registration and KYC process, and choose the floater fund that aligns with your investment goals.

Benefits of Investing in Floater Funds

1. Reduced Risk: Floater funds offer a lower risk compared to equity investments, making them suitable for conservative investors who prefer capital protection.
2. Interest Rate Advantage: These funds benefit from rising interest rates as they invest in floating-rate instruments that adjust their returns in response to market conditions.
3. Diversified Returns: By investing in a range of debt securities, floater funds provide opportunities for capital gains and periodic income through dividends.

Taxation Rules for Floater Funds

1. Short-Term Capital Gains (STCG): If you sell your floater fund units within three years of purchase, you will be taxed on the gains as short-term capital gains. The tax rate is based on your income tax slab, with rates varying depending on your total income.
2. Long-Term Capital Gains (LTCG): If you hold units for more than three years, you consider the gains long-term. These gains are taxed at 20% with the benefit of indexation, which adjusts the gains for inflation to provide fair tax treatment.

Conclusion

A floater fund offers a dynamic investment option for those looking to benefit from fluctuating interest rates while maintaining a conservative risk profile. They are particularly attractive to investors seeking stable returns with lower volatility compared to equity investments. Understanding the features, benefits, and taxation implications of floater funds can help you make informed investment decisions.