Floater Mutual Funds

Any Indian citizen can invest in floater funds through a portfolio manager. However, investors with the following preferences generally invest in floater funds:

You can analyse and predict the movement of interest rates (read, Repo rates) in the economy. Floater funds usually deliver higher returns when the interest rates are in an uptrend.
You are looking for a mutual fund to diversify your investment. Floater funds are generally more stable than equity funds or aggressive debt funds. Hence, these funds can efficiently reduce your portfolio’s volatility.
Any investor looking for less volatile fixed income instruments can invest in floater funds. These funds invest in high-quality debt instruments, making them relatively immune from volatility.
You are looking for a tax-efficient mutual fund. As with all debt funds, floater fund long-term returns are taxed at 20% after factoring in indexation. The indexation feature reduces your overall tax liability.
Any investor with a long-term investment horizon can invest in floater funds. These funds generally invest in long-term corporate bonds and government securities. However, choosing liquid funds or other open-ended debt funds is better if you are a short-term investor.
Any first-time investor willing to understand the dynamics of debt funds can invest in floater funds to improve their understanding of the secondary market in general and interest rates in particular.

Open-Ended – Floater funds are usually open-ended, meaning you can enter into and exit from these funds any time you want.
Diversification – Floater funds offer excellent diversification opportunities. These funds invest around 65% of the total assets in floating-rate debt instruments and the remaining in fixed income instruments. This is why these funds increase in value when the interest rate rises. A floater fund can help you cushion the impact of a fall in equity stocks.
Low Risk – Because it relies on fixed income instruments, floater funds are a lot less volatile than aggressive debt funds or equity funds. But, like any other debt fund, floater funds carry some credit risks. If the issuer of a corporate bond defaults, the investor may lose their investment. This is why most fund managers choose high-quality bonds for investments.

Floater Funds’ Performance
All big mutual fund houses like UTI, HDFC, Aditya Birla, Franklin, Nippon, ICICI Prudential, Kotak, Axis, SBI, Tata, etc., offer floater funds for investment. However, although floater funds are managed by top fund managers with many years of experience, not all funds provide similar returns.

So, checking the historical performance of the best floater funds is imperative before picking the best fund(s) to invest. Also, you must analyse the 1-year, 3-year, 5-year, and since inception returns to find the top funds.

Since floater fund returns depend on the benchmark interest rates, try to evaluate the fund’s performance when the interest rate rises. This is because floater funds generally deliver lower returns when the interest rate declines.

Benchmark Comparison
Benchmark refers to an index mutual fund houses use to measure the performance of their schemes. It compares the securities in the scheme against a group of unmanaged but related securities. Floater funds may outperform or underperform the Benchmark.

For instance, if the benchmark NIFTY Midcap 100 increases, it proves that investors are pouring money into midcap stocks. In contrast, if the Benchmark tumbles, investors are turning away from midcap stocks.

Funds are compared against the Benchmark they follow. Generally, floater funds’ performances are generally measured against the CRISIL Low Duration Debt or NIFTY Low Duration Debt Index.

Remember, the best floater funds are the ones that outperform the Benchmark. Also, you may pick floater funds that outperform the Benchmark and the category.

Floater Funds’ Expense Ratio
Mutual fund houses levy a management fee to manage investors’ capital assets and sponsor their establishment costs. The expense ratio of floater funds is minimal, but it reduces the investor’s profit. So, it is wise to check the expense ratio to maximise profits.

While fixing the expense ratio of specific mutual fund schemes, fund houses must abide by the guidelines laid by the Securities and Exchange Board of India (SEBI). Before investing in the best floater funds, you must evaluate the expense ratio. Generally, floater fund expense ratios hover between 0.22% and 0.60%.

Taxation
Floater mutual funds are considered debt funds for taxation. So, if you keep your investment for more than three years, you have to pay an LTCG (Long Term Capital Gains) tax of 20% after indexation. However, if you sell your fund units before one year from the investment date, the income will get added to your taxable income, and you have to pay taxes accordingly, along with cess and surcharge.

So, before investing or withdrawing money from a floater fund, analyse the taxes to maximise your income.

Financial Goals
Despite being classified as debt funds and taxed accordingly, floater funds are often more remunerative than fixed-rate debt funds like liquid funds or ultra short-duration debt funds. A quick scan of the top floater mutual funds shows that these funds typically deliver annualised returns between 6% and 8.50%. In fact, floater funds have delivered average annualised returns of around 8.27% in the previous five years.

Floater mutual funds are usually more volatile than fixed-rate debt since they depend on the REPO Rate. So, floater funds are best-suited for investors with a long-term investment horizon. Tracking top floater funds’ historical performance can give you a perfect idea about the returns you may expect. Hence, link your floater fund investments with a noble financial goal and invest accordingly.

Floater Funds’ Exit Load
Exit load refers to the fee mutual fund houses charge for facilitating withdrawals before a specific date from the investment date. The best part of floater mutual funds is that there is no exit load on withdrawals. Hence, you may enter these funds at will and exit similarly.

Fund Manager’s Expertise
Floater funds are typically more complex than standard fixed-rate debt funds. Floater fund managers must consistently analyse the interest rate and inflation and try to predict the RBI’s mindset.

The fund manager’s knowledge and expertise play a significant role in determining floater funds’ returns. Generally, Indian mutual fund houses appoint debt market specialists as floater fund managers. However, evaluating the fund manager’s historical record is still good before investing in the best floater funds.

Regular or Direct
The returns from regular floater funds are usually lower than direct funds. When you invest in a regular fund, the fund house transfers a percentage of the investment amount to the distributor or agent who opened your account. In contrast, you can invest directly through 5paisa to avoid paying distributor charges and get better returns from your floater fund investments.

You need to pay three types of taxes if your net profits exceed INR 1 lakh from all mutual fund investments, including floater funds.
Dividend Income – All dividends are taxed as per the investor’s tax slab. So, if you fall in the 10% tax bracket, you have to pay 10% of your dividend income as a tax.
LTCG – LTCG or Long-Term Capital Gains tax apply on all withdrawals made after three (3) years from the investment date. The applicable rate is 10% without indexation or 20% with indexation.
STCG – STCG or Short-Term Capital Gains tax apply on all withdrawals made before three (3) years from the investment date. STCG is taxed as per the investor’s income tax slab.

Dependence on Interest Rates – Floater fund returns depend entirely on the benchmark rates set by the Reserve Bank of India. Any decline in the rates may cause significant losses for floater fund investors since a rate cut adversely affects corporate bonds, government securities, and the like. Hence, it is wise to invest in floater funds after carefully analysing the macroeconomic scenario of India.
Credit Risk – While floater fund managers are generally cautious about selecting the debt instruments, they cannot predict a rating downgrade. If the debt instrument undergoes a rating downgrade after you invest, your fund value may decrease. And, if the issuer of the debt instrument defaults, your fund value may receive a severe blow.
No Control – Although you can control the amount you want to invest in floater funds, you cannot control the debt instruments the fund manager chooses to invest in. Floater fund investors depend on the good judgement of the fund manager to make profits. So, you must evaluate the fund manager’s reputation while choosing a floater fund.

High Returns – Floater funds are carefully crafted to minimise risks while maximising profits. While the fixed income component of these funds ensures decent returns, the floating-rate component ensures capital growth.
Minimum Investment – You can start floater fund investments from a lowly INR 500. Floater funds accept two types of investments – lump sum and SIP. Lump-sum refers to a ‘one-time’ investment of INR 5,000 or more. SIP or Systematic Investment Plan starts from INR 500 every month.
Diversification – Floater funds are an excellent tool for diversifying your capital investment. While you can invest a part of your capital in high-risk instruments, investments in floater funds can help you to fulfil your financial obligations.