Read this blog to know all about floater funds, how it works, the benefits & risks, and the bottom line. Find out how Cube Wealth helps you invest in the best debt funds like liquid funds and overnight funds.
February 2, 2021
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Debt funds invest in various debt and money market instruments like Treasury Bills, Bonds, Commercial Paper, Reverse Repo, etc. Some of these debt instruments provide a fixed interest rate while others do not.
In this case, the “others” generate floating returns, which means that the interest rate may fluctuate according to the market conditions. Floater funds invest in such debt securities.
Important: This blog is meant to educate readers and the information furnished here is not to be construed as investment advice from Cube Wealth.
How Does A Floater Fund Work?
A floater fund is a type of debt fund that primarily invests in debt securities with a floating interest rate. At least 65% of a floater fund's portfolio consists of assets with a floating interest rate.
Types Of Floater Funds
1. Short Term Floater Fund
A short term floater fund invests in floating interest debt securities with a short maturity tenure like government securities.
2. Long Term Floater Fund
A long term floater fund invests in long term debt securities. However, longer the term, greater the interest rate. Thus, these funds balance their remaining portfolio with fixed interest and money market securities.
Impact Of Interest Rates On Floater Funds
The floating interest rate securities that floater funds invest in track a benchmark that determines the increase or decrease in the interest rate of the security.
The performance of a floater fund is thus intertwined with the movement of interest rates of the securities it invests in. If the interest rate rises, the floating fund gains value; if it falls, the fund loses value.
3 Advantages of Floater Funds
1. Open-Ended
Most floater funds are open-ended debt schemes which means that you can buy or sell units of a floater fund at any time.
2. Diverse Portfolio
Floater funds invest in a broad range of debt instruments that have floating interest rates. The remaining portfolio consists of fixed income securities.
3. Low Risk
Floater funds are considered to be safe because they’re debt funds that invest in debt instruments that carry low risk and volatility.
3 Limitations of Floater Funds
1. Impacted By Interest Fluctuations
Fluctuating interest rates affect the performance of debt securities that a floater fund invests in. These fluctuations directly impact the NAV of the floater fund.
2. Impact Of Repo Rates
In general, the RBI’s repo rate has a huge impact on the debt market. Repo rate determines the interest that must be paid by a commercial bank or any other institution that borrows money from the RBI.
3. Unpredictable Returns
Debt funds like liquid funds and overnight funds generally deliver predictable returns due to the short maturity period and the fixed interest securities that they invest in.
However, this is not the case with floater funds since they invest in fluctuating interest securities that end up delivering unpredictable returns.
Debt Funds Recommended By Cube Wealth
You can invest in the best debt funds using the Cube Wealth app. The debt funds are handpicked by Wealth First, who curate a set of best debt funds for Cube users every month. These debt funds include:
Liquid funds are comparatively safe debt funds that invest debt and money market instruments that mature in 60-91 days. Read all about liquid funds here.
3. Banking & PSU debt Funds
Banking & PSU debt Funds lend to banking and PSU companies.
4. Money Market Funds
Money market funds invest in cash and cash equivalents.
Taxes on gains from floater funds is similar to any other debt fund:
1. Short Term Capital Gains
You’ll have to pay a Short Term Capital Gains tax if you sell your floater funds within 3 years. The tax rate is calculated according to the investor’s tax slab.
2. Long Term Capital Gains
If you sell your floater funds after 3 years, you’ll be liable to pay a Long Term Capital Gains tax that’s 20% with indexation benefits.
Overall, floater funds are considered to be safer than equity funds but are more prone to interest rate risk than other debt funds like overnight funds and liquid funds.
The Cube Wealth app helps you invest in the best debt funds like Overnight funds, Liquid funds, Money Market funds, Banking & PSU funds, etc. with advice from Wealth First, Cube’s advisory partner.
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