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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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1Y Returns
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|
|---|---|---|---|
ICICI Pru Floating Interest Fund-Regular (G) Debt|Floater Fund Buy |
₹7456.75 cr. | 8.67% | |
|
ICICI Pru Floating Interest Fund-Regular(IDCWOthr) - Reinvestment Debt|Floater Fund Buy |
₹7456.75 cr. | 8.67% | |
|
ICICI Pru Floating Interest Fund-Regular (IDCW-W) Debt|Floater Fund Buy |
₹7456.75 cr. | 12.88% | |
|
ICICI Pru Floating Interest Fund-Regular (IDCW-D) Debt|Floater Fund Buy |
₹7456.75 cr. | 8.66% | |
|
ICICI Pru Floating Interest Fund-Regular (IDCW-W) Debt|Floater Fund Buy |
₹7456.75 cr. | 12.88% | |
|
ICICI Pru Floating Interest Fund-Regular(IDCWOthr) Debt|Floater Fund Buy |
₹7456.75 cr. | 8.67% | |
|
Tata Floating Rate Fund-Regular (IDCW-Periodic) RI - Reinvestment Debt|Floater Fund Buy |
₹115.51 cr. | 9.38% | |
|
Tata Floating Rate Fund-Regular (IDCW-M) RI Debt|Floater Fund Buy |
₹115.51 cr. | 9.38% | |
|
Tata Floating Rate Fund-Regular (IDCW-Q) RI Debt|Floater Fund Buy |
₹115.51 cr. | 9.38% | |
|
Tata Floating Rate Fund-Regular (IDCW-M) RI - Reinvestment Debt|Floater Fund Buy |
₹115.51 cr. | 9.38% |
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.
Floater Funds operate by investing in debt instruments that have adjustable interest rates, meaning their returns move in tandem with market fluctuations. The interest rates on these instruments are linked to specific benchmarks, such as the Reserve Bank of India’s (RBI) repo rate, government securities, or Treasury bills. When the RBI increases interest rates, the yields on these floating-rate securities also rise, leading to higher returns for investors. In contrast, when interest rates decline, the returns on Floater Funds adjust accordingly. Fund managers may also use derivative instruments, such as Overnight Index Swaps (OIS), to convert fixed-rate bonds into floating-rate instruments, ensuring flexibility in portfolio management. Floater Funds are an ideal choice for investors looking to hedge against interest rate risks while maintaining stable returns in a fluctuating debt market.
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 broadly classified into two types based on their investment horizon and underlying securities:
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:
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:
Step 1: Open a Bajaj Broking Account
Step 2: Research and Select the Right Floater Fund
Step 3: Choose the Investment Mode
Step 4: Make the Investment
Step 5: Track and Manage Your Investment
Investing in floater funds offers several advantages, particularly for those seeking stable returns with lower interest rate risks. Here are some key benefits:
Interest Rate Risk - Floater funds perform well when interest rates rise, but if rates fall, the returns from these funds may decline, impacting investors' expected gains.
Credit Risk - 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.
Market Liquidity Risk - 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.
Expense Ratio Impact - 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.
Basis Risk - 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.
Limited Availability of Floating-Rate Bonds - 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.
Impact of Government Policies - 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.
Limited Supply of Floating-Rate Bonds - 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.
Fund Benchmark and Strategy - 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.
Rate Uncertainty - 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 fall under the debt mutual funds category, and their taxation is similar to that of other debt funds. The tax treatment depends on the holding period of the investment:
Type of Capital Gain | Holding Period | Tax Rate |
Short-Term Capital Gain | Less than 36 months | Taxed as per the investor’s income tax slab |
Long-Term Capital Gain | 36 months or more | 20% with indexation benefit |
Dividends earned from floater fund investments are added to the investor’s taxable income and taxed according to their income tax slab. Additionally, if the dividend amount exceeds ₹5,000 in a financial year, a 10% Tax Deducted at Source (TDS) is applied to the excess amount.
Floater funds are a popular choice for investors looking to benefit from fluctuating interest rates while maintaining liquidity. Below is a comparison of the top five floater funds in India based on their Assets Under Management (AUM), Expense Ratio, Yield to Maturity (YTM), and past returns.
Name of the Fund | AUM (₹ Cr) | Expense Ratio | Average YTM | Category YTM | CAGR 3Y | CAGR 5Y |
HDFC Floating Rate Debt Fund | 14,929.39 | 0.26% | 7.80% | 7.70% | 7.15% | 6.98% |
Aditya Birla SL Floating Rate Fund | 13,287.06 | 0.23% | 7.72% | 7.70% | 7.03% | 6.66% |
ICICI Pru Floating Interest Fund | 7,776.88 | 0.55% | 7.98% | 7.70% | 7.48% | 7.31% |
Nippon India Floating Rate Fund | 7,580.55 | 0.31% | 7.81% | 7.70% | 6.82% | 7.14% |
Kotak Floating Rate Fund | 3,577.76 | 0.25% | 7.85% | 7.70% | 6.81% | 7.28% |
HDFC Floating Rate Debt Fund
This fund has the highest AUM at ₹14,929.39 crore and an expense ratio of 0.26%. It offers an average YTM of 7.80%, slightly above the category YTM of 7.70%. With a 3-year CAGR of 7.15%, it ranks third among the funds listed, while its 5-year CAGR of 6.98% is the lowest among the top five.
Aditya Birla SL Floating Rate Fund
With an AUM of ₹13,287.06 crore, this fund has the lowest expense ratio at 0.23%. Its average YTM is 7.72%, in line with the category average. The fund has delivered a 3-year CAGR of 7.03%, ranking fourth, while its 5-year CAGR of 6.66% is the lowest in the group.
ICICI Pru Floating Interest Fund
This fund has an AUM of ₹7,776.88 crore and the highest expense ratio among the top five at 0.55%. It boasts the highest average YTM at 7.98%, well above the category YTM of 7.70%. It also leads in 3-year returns, with a CAGR of 7.48%, and holds the second position in 5-year performance with a CAGR of 7.31%.
Nippon India Floating Rate Fund
With an AUM of ₹7,580.55 crore and an expense ratio of 0.31%, this fund has an average YTM of 7.81%. It ranks fifth in 3-year CAGR at 6.82% and fourth in 5-year CAGR at 7.14%.
Kotak Floating Rate Fund
This fund has the lowest AUM among the five, at ₹3,577.76 crore, and an expense ratio of 0.25%. With an average YTM of 7.85%, it exceeds the category YTM of 7.70%. It ranks fifth in 3-year performance with a CAGR of 6.81%, while its 5-year CAGR of 7.28% is the third highest.
Floater funds are a suitable investment option for those looking to mitigate interest rate risks while earning returns aligned with fluctuating market rates. These funds invest in floating-rate instruments, offering a balance between stability and potential yield growth. However, investors should consider factors such as expense ratios, past performance, and benchmark strategy before making a decision.
For investors looking to explore floater funds as part of their portfolio, Bajaj Broking offers a seamless platform to research, compare, and invest in the most suitable mutual funds based on financial goals and risk appetite.
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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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Mutual Fund Sub Category |
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