Floater funds are a type of debt mutual fund designed to adjust with changing interest rates in the market. These funds primarily invest in floating-rate debt instruments, making them an attractive option for investors Read more..looking to benefit from fluctuations in interest rates. Unlike fixed-income funds that offer a predetermined interest rate, floater funds provide returns that vary according to market conditions. They are particularly useful in a rising interest rate environment, as they help mitigate duration risk while offering potential capital appreciation. Read less
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Name
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AUM
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3Y Returns
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| ₹298.00 cr | 7.58 % | ||
| ₹298.00 cr | 7.53 % | ||
| ₹13,512.11 cr | 7.32 % | ||
| ₹7,585.02 cr | 7.49 % | ||
| ₹7,585.02 cr | 7.07 % | ||
| ₹7,585.02 cr | 7.18 % | ||
| ₹7,585.02 cr | 7.34 % | ||
| ₹7,837.29 cr | 7.63 % | ||
| ₹7,837.29 cr | 7.63 % | ||
| ₹13,512.11 cr | 9.83 % |
A Floater Fund is a type of debt mutual fund that primarily invests in floating-rate debt instruments. These funds allocate a significant portion of their corpus—at least 65%—to securities that have variable interest rates, such as corporate bonds and other similar debt instruments. Unlike fixed-rate bonds, the interest rates of these instruments fluctuate based on prevailing market conditions, allowing investors to benefit from changes in interest rates. Floater Funds are particularly attractive in a rising interest rate environment, as they provide better returns compared to traditional fixed-income investments.
A floater mutual fund keeps at least 65% of its money in debt instruments where the interest rate isn't fixed — it moves with the market. When benchmark rates shift, the returns on these instruments shift with them.
Rate linkage: Each instrument's yield is tied to a benchmark — typically the RBI's repo rate or Treasury bills. Rates go up, the fund earns more. Rates come down, returns ease off too.
Synthetic exposure: Genuine floating-rate bonds are hard to find in India's debt market. To fill that gap, fund managers use Overnight Index Swaps (OIS) — contracts that effectively convert fixed-rate bonds into floating-rate ones.
Portfolio rebalancing: The mix between real floating-rate securities and synthetically converted ones gets adjusted as the rate environment changes. It's an active process, not a set-and-forget portfolio.
Return profile: Because returns move with rates rather than being locked in, floater mutual funds respond differently to rate cycles than fixed-duration funds. Useful when rates are climbing — less so when they're coming down.
Floater funds come with distinct characteristics that set them apart from traditional debt funds. Below are the key features explained in detail:
Floater funds are typically open-ended schemes, allowing investors the flexibility to enter and exit at any time. This makes them an attractive option for those who want liquidity and ease of access.
To qualify as a floating-rate mutual fund, at least 65% of the fund’s assets must be invested in floating-rate debt instruments. The remaining portion can be allocated to fixed-income securities. This mix helps mitigate risk while maximising potential returns.
Compared to equity funds, floater funds have considerably lower risks. However, they are slightly riskier than fixed-income funds. Choosing high-credit-rated floater funds can help investors minimise credit risk while still earning favourable returns.
Floater funds cater to different investment horizons through two main types—short-term and long-term. Short-term floater funds invest in instruments such as treasury bills and certificates of deposit, while long-term floater funds focus more on corporate bonds and government securities.
Floater funds are broadly classified into two types based on their investment horizon and underlying securities:
These funds invest primarily in short-term debt securities, such as treasury bills, certificates of deposit, and other government-backed instruments with maturities of less than one year. They offer stability and liquidity, making them ideal for conservative investors who seek minimal risk.
These funds allocate a significant portion of their portfolio to floating-rate corporate bonds, government securities, and debentures. They are designed for investors with a longer investment horizon who can withstand moderate interest rate fluctuations in pursuit of higher returns.
Investors should carefully assess their risk tolerance and financial goals before selecting a floater fund.
Floater funds are a suitable investment option for individuals looking for a balance between risk and returns. These funds primarily invest in floating-rate debt instruments, making them less risky than equity investments while offering better returns than traditional fixed-income securities.
Key investor profiles for floater funds include:
Those who prefer relatively stable returns with lower risk compared to equity investments. Floater funds provide a cushion against market volatility while generating returns based on changing interest rates.
If you have a significant portion of your investments in equities, floater funds can help mitigate risk by adding debt instruments that adjust to interest rate fluctuations.
Floater funds tend to perform well in a rising interest rate environment. If the economy is experiencing an upward trend in interest rates, these funds can offer higher yields.
Individuals who wish to park their funds for a short to medium duration can consider floater funds, as they offer better liquidity and returns than traditional fixed deposits.
Investors in higher tax brackets may find floater funds more tax-efficient than traditional fixed-income options due to indexation benefits on long-term capital gains.
Before investing, it is advisable to assess the credit rating of the underlying securities within the floater fund and ensure that it aligns with your financial goals and risk appetite.
Investing in floater funds is a straightforward process, and investors can conveniently access these funds through Bajaj Broking. Follow these steps to invest:
Investing in floater funds offers several advantages, particularly for those seeking stable returns with lower interest rate risks. Here are some key benefits:
Floater funds are suitable for investors who prefer lower-risk investments compared to equity funds. Since these funds primarily invest in debt securities with floating interest rates, they offer stability while reducing the risk associated with market volatility.
One of the key advantages of floater funds is their ability to adjust returns based on changing interest rates. Unlike fixed-income securities, which may lose value when interest rates rise, floater funds benefit from increasing rates, making them an ideal choice during a rising interest rate environment.
Since floater funds invest a significant portion in floating-rate instruments, they have the potential to generate better returns compared to traditional fixed-income securities. Investors can take advantage of higher yields when interest rates trend upward.
Floater funds allocate at least 65% of their assets in floating-rate debt instruments, while the remaining portion is invested in fixed-income securities. This mixed allocation helps spread risk and enhances portfolio diversification, making it a prudent choice for investors looking to balance their asset allocation.
Most floater funds operate as open-ended schemes, meaning investors can enter or exit these funds at any time based on their financial needs. However, these funds typically do not offer a Systematic Investment Plan (SIP) option, requiring investors to make lump sum investments.
For investments held for more than three years, floater funds offer indexation benefits, reducing tax liability on long-term capital gains. This makes them a tax-efficient option for investors looking for long-term wealth accumulation.
Lower interest rate risk than fixed-duration funds doesn’t mean no risk. Credit quality of holdings, liquidity in the underlying market, and the reliability of the derivative positions all matter — and can catch investors off guard.
Floater funds perform well when interest rates rise, but if rates fall, the returns from these funds may decline, impacting investors' expected gains.
The performance of floater funds depends on the credit quality of the underlying debt instruments. If a bond issuer defaults or its credit rating is downgraded, it can negatively impact returns.
Since floating-rate bonds constitute a small portion of the total corporate bond market, fund managers may face liquidity constraints, making it challenging to buy or sell securities at favourable prices.
Investors should consider the expense ratio of the floater fund, as higher management fees can reduce overall returns. Choosing a fund with a reasonable expense ratio is crucial for maximising gains.
The interest rate swaps used to manage floater funds may not always align perfectly with the benchmark rate movements, leading to a mismatch in expected returns.
In the Indian debt market, floating-rate bonds make up a small portion of outstanding corporate bonds. This limited supply may result in fund managers using derivatives like Overnight Index Swaps (OIS) to synthetically create floating-rate exposure, introducing additional risks.
Floater funds are directly influenced by the Reserve Bank of India's (RBI) repo rate changes and government fiscal policies. Any unexpected policy shift can impact the returns generated by these funds.
Floater funds remain a preferred choice for investors looking to hedge against rising interest rates while maintaining portfolio stability. Before investing, individuals should assess their financial goals, risk tolerance, and market conditions to make an informed decision.
Floater funds work differently from most debt funds — partly because of the derivatives involved and partly because genuine floating-rate supply in India is thin. That context matters when you're deciding whether this category fits your situation.
Floating-rate bonds form a small portion of the Indian debt market, making up only about 5% of the total outstanding corporate bond issuances. Due to this limited availability, fund managers often use derivative instruments such as Overnight Index Swaps (OIS) to convert fixed-rate bonds into floating-rate instruments. This approach helps meet regulatory requirements and maintain the fund’s floating nature.
The profitability of floater funds depends on changes in benchmark interest rates. Short-term interest rates, such as those represented by MIBOR (Mumbai Interbank Offered Rate), tend to be more stable than Treasury bill (T-bill) and Government securities (G-sec) rates, which are influenced by market sentiments. Additionally, there is a basis risk, meaning that the interest rate swap may not fully offset fluctuations in the yield of the underlying bond.
The Indian economy has experienced historically low interest rates, with the 10-year benchmark G-sec yield standing at around 6.3% per annum. Given the gradual post-pandemic recovery, the Reserve Bank of India (RBI) is unlikely to increase rates aggressively. However, a growing fiscal deficit could lead to higher inflation, potentially pushing interest rates upward. Investors should carefully evaluate economic conditions before investing in floater funds.
Floater funds sit in the debt mutual fund category for tax purposes. The holding period is what decides whether you're paying tax at your slab rate or at the long-term rate with indexation working in your favour.
Short-term capital gains (STCG): Sell within 36 months and the profit lands in your income, taxed at whatever slab rate applies to you. No separate flat rate; it just gets added on top.
Long-term capital gains (LTCG): Cross the 36-month mark, and the gains qualify as long-term, taxed at 20% with indexation. Indexation adjusts your purchase cost for inflation, which shrinks the taxable gain — sometimes significantly.
Dividend taxation: The IDCW option passes income to you directly, but that amount gets added to your taxable income and taxed at your slab rate. Dividends over ₹5,000 in a financial year also attract 10% TDS before they reach you.
Floater funds primarily invest in debt instruments with variable interest rates, offering potentially higher returns when interest rates rise. While they carry lower risk than equity funds, they are subject to interest rate fluctuations and credit risk. Investors with a low-risk appetite should assess these factors before investing.
Floater funds are subject to interest rate fluctuations and credit risk. While they may offer higher returns when interest rates rise, they can also experience decreased returns if rates fall. Investors should consider these risks before investing.
Floater funds are suitable for investors seeking to benefit from rising interest rates while aiming to preserve capital. They can diversify a portfolio and may appeal to those comfortable with moderate risk and market fluctuations.
An example of a floater fund is the HDFC Floating Rate Debt Fund, which invests primarily in floating rate debt instruments. Investors can explore such funds through platforms like Bajaj Broking.
Investing in floater funds can be advantageous in a rising interest rate environment, as they may offer higher returns compared to fixed-rate debt funds. However, they also carry risks, such as potential declines in returns if interest rates fall. Investors should assess their risk tolerance and investment goals before investing.
Floater funds have delivered returns close to 8% over the past year, outperforming other debt fund categories.
Floater funds carry risks such as potential declines in returns if interest rates fall, credit risk from bond issuer defaults, and market risk due to economic or political changes.
Yes, gains from floater funds are taxable. Short-term capital gains (holding period less than 3 years) are taxed as per the investor's income tax slab, while long-term capital gains (holding period more than 3 years) are taxed at 20% with indexation benefits.
The amount to invest in floater funds depends on individual financial goals, risk tolerance, and investment horizon. It's advisable to consult with a financial advisor, such as those at Bajaj Broking, to determine an appropriate investment amount based on your specific circumstances.
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