Floater Mutual Funds

A floater fund is a special type of debt mutual fund that invests around 65% of its assets in floating-rate debt instruments. These funds generally invest in corporate bonds since, unlike government bonds, corporate bonds offer a floating rate of interest. Government bonds usually provide a fixed rate of interest. However, floater funds can also invest in government securities to suit their investment objectives.  

Floater funds are susceptible to the REPO (Repurchasing Option) rate set by the Reserve Bank of India (RBI). As a fact, floater funds and Repo rates share a direct relationship. If the Repo rates increase, floater funds generate higher returns and vice versa. Hence, an ideal time for investing in floater funds is when the Repo rates are in an uptrend.

Who Should Invest in Floater Mutual Funds?

Floater funds are debt funds that invest in floating-rate corporate bonds and other fixed-income instruments, including money market instruments and government securities. Floater fund returns depend on interest rate fluctuations in the economy.  

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. 

Features of Floater Mutual Funds

The best floater funds allow investors to profit from interest rate fluctuations in the economy. The following are the top features of floater funds:

  • 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. 

Factors to consider while investing in Floater Funds

Here is a list of factors you can consider before investing in floater funds.

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.   

Taxability of Floater Funds

The best floater funds are extremely tax efficient. You have to pay the same type of taxes as you will with any other debt fund. Here is a lay down on the tax implications of 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.   

Risks Involved With Floater Funds

Investors generally prefer floater funds with a low-risk appetite. These funds are typically more stable than aggressive debt funds and equity funds. Here are the most common risks of investing in floater funds:

  • 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. 

Advantages of Floater Mutual Funds

  • Minimal Risk – Floater mutual funds are much less risky than equity funds. Since these funds invest primarily in bonds, government securities, and fixed income instruments, the risks of capital loss are minimal.
  • 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.  

Best Floater Funds

Floater funds are more challenging to manage than fixed-rate debt funds. This is why only top companies with the best fund managers offer floater mutual funds. Here is the most comprehensive list of the best-performing floater mutual funds in India in 2022: 

UTI Floater Fund

  • UTI Floater Fund Direct-Growth invests its assets in floating-rate debt instruments, such as bonds, treasury bills, GOI securities, certificates of deposit, commercial papers, debentures, and non-convertible debentures. The asset size of this fund is INR 2,212 Crore as of 31st July 2022. The top holdings of this fund are Reserve Bank of India 182-D 10/11/2022, Reserve Bank of India 182-D 03/11/2022, HDFC Bank 2023, Axis Finance 24/05/2024, 7.45% REC 30/11/2022, Canara Bank 14/03/2023, etc., as of 31st July 2022. The fund’s expense ratio is 0.34% as of 30th June 2022, and the exit load is zero. The Benchmark of this fund is CRISIL Low Duration Debt.
  • Fund Manager – Mr Sudhir Agarwal
  • Minimum Investment – INR 500
  • Minimum SIP Investment – INR 500
  • Minimum Withdrawal – INR 500
  • Fund’s Performance – UTI Floater Fund Direct-Growth was launched on 30th October 2018 and has delivered returns of 3.24% in 1-year, 5.66% in 3-year, and 6.59% since inception. 

HDFC Floating Rate Debt Fund

  • HDFC Floating Rate Debt Fund Direct-Growth invests its assets in floating-rate debt instruments, such as bonds, treasury bills, GOI securities, certificates of deposit, commercial papers, debentures, and non-convertible debentures. The asset size of this fund is INR 16,111 Crore as of 31st July 2022. The top holdings of this fund are 4.45% GOI 30/10/2034, GOI 2028, GOI 22/09/2033, HDFC 30/09/2024, Reserve Bank of India 182-D 24/11/2022, Power Finance Corporation 2024, Panatone Finvest 364-D 30/01/2023, etc., as of 31st July 2022. The fund’s expense ratio is 0.26% as of 30th June 2022, and the exit load is zero. The Benchmark of this fund is NIFTY Low Duration Debt Index.
  • Fund Manager – Mr Shobhit Mehrotra
  • Minimum Investment – INR 5,000
  • Minimum SIP Investment – INR 300
  • Minimum Withdrawal – INR 500
  • Fund’s Performance – HDFC Floating Rate Debt Fund Direct-Growth was launched on 1st January 2013 and has delivered returns of 3.47% in 1-year, 6.27% in 3-year, 6.80% in 5-year, and 7.83% since inception. 

Aditya Birla Sun Life Floating Rate Fund

  • Aditya Birla Sun Life Floating Rate Fund Direct-Growth invests its assets in floating-rate debt instruments, such as bonds, treasury bills, GOI securities, certificates of deposit, commercial papers, debentures, and non-convertible debentures. The asset size of this fund is INR 12,762 Crore as of 31st July 2022. The top holdings of this fund are GOI 22/09/2033, Reliance Industries 21/09/2023, 8.45% Sikka Ports and Terminals 2023, 5.09% National Bank Agr. Rur. Devp 2024, 8.21% Haryana State 31/03/2023, 7.68% L&T Finance 2023, etc., as of 31st July 2022. The fund’s expense ratio is 0.23% as of 30th June 2022, and the exit load is zero. The Benchmark of this fund is CRISIL Low Duration Debt.
  • Fund Manager – Mr Harshil Suvarnkar
  • Minimum Investment – INR 1,000
  • Minimum SIP Investment – INR 1,000
  • Minimum Withdrawal – INR 1
  • Fund’s Performance – Aditya Birla Sun Life Floating Rate Fund Direct-Growth was launched on 1st January 2013 and has delivered returns of 3.83% in 1-year, 6.05% in 3-year, 6.78% in 5-year, and 8.04% since inception. 

Franklin India Floating Rate Fund

  • Franklin India Floating Rate Fund Direct-Growth invests its assets in floating-rate debt instruments, such as bonds, treasury bills, GOI securities, certificates of deposit, commercial papers, debentures, and non-convertible debentures. The asset size of this fund is INR 316 Crore as of 31st July 2022. The top holdings of this fund are 6.51% GOI 2024, GOI 2031, Aditya Birla Housing Finance 17/02/2023, and 5.35% LIC Housing Fin. 20/03/2023, Bajaj Finance 91-D 26/08/2022, Axis Bank 2022, 6.70% National Bank Agr. Rur. Devp 2022, etc., as of 31st July 2022. The fund’s expense ratio is 0.29% as of 30th June 2022, and the exit load is zero. The Benchmark of this fund is CRISIL Low Duration Debt.
  • Fund Manager – Mr Pallab Roy and Mr Umesh Sharma
  • Minimum Investment – INR 1,000
  • Minimum SIP Investment – INR 500
  • Minimum Withdrawal – INR 1,000
  • Fund’s Performance – Franklin India Floating Rate Fund Direct-Growth was launched on 1st January 2013 and has delivered returns of 3.46% in 1-year, 5.28% in 3-year, 6.11% in 5-year, and 6.70% since inception. 

Nippon India Floating Rate Fund

  • Nippon India Floating Rate Fund Direct-Growth invests its assets in floating-rate debt instruments, such as bonds, treasury bills, GOI securities, certificates of deposit, commercial papers, debentures, and non-convertible debentures. The asset size of this fund is INR 10,643 Crore as of 31st July 2022. The top holdings of this fund are 7.35% GOI 22/06/2024, 5.00% Bajaj Housing Finance 15/09/2023, Reliance Industries 17/04/2023, 7.68% GOI 15/12/2023, 6.79% Tata Capital 28/12/2023, 5.60% Tata Capital Housing Finance 2023, etc., as of 31st July 2022. The fund’s expense ratio is 0.28% as of 30th June 2022, and the exit load is zero. The Benchmark of this fund is CRISIL Short Term Bond Index.
  • Fund Manager – Ms Anju Chhajer
  • Minimum Investment – INR 5,000
  • Minimum SIP Investment – INR 1,000
  • Minimum Withdrawal – INR 100
  • Fund’s Performance – Nippon India Floating Rate Fund Direct-Growth was launched on 1st January 2013 and has delivered returns of 3.16% in 1-year, 6.87% in 3-year, 6.91% in 5-year, and 8.02% since inception. 

ICICI Prudential Floating Interest Fund

  • ICICI Prudential Floating Interest Fund Direct-Growth invests its assets in floating-rate debt instruments, such as bonds, treasury bills, GOI securities, certificates of deposit, commercial papers, debentures, and non-convertible debentures. The asset size of this fund is INR 11,895 Crore as of 31st July 2022. The top holdings of this fund are GOI 22/09/2033, GOI 2028, 4.45% GOI 30/10/2034, 6.65% Samvardhana Motherson International 14/09/2023, 6.43% Godrej Industries 26/04/2024, 8.76% TMF Holdings, Tata Capital Financial Services 2024, etc., as of 31st July 2022. The fund’s expense ratio is 0.60% as of 30th June 2022, and the exit load is zero. The Benchmark of this fund is CRISIL Low Duration Debt.
  • Fund Manager – Mr Nikhil Kabra
  • Minimum Investment – INR 500
  • Minimum SIP Investment – INR 100
  • Minimum Withdrawal – INR 1
  • Fund’s Performance – ICICI Prudential Floating Interest Fund Direct-Growth was launched on 1st January 2013 and has delivered returns of 2.66% in 1-year, 6.57% in 3-year, 6.96% in 5-year, and 8.19% since inception. 

Kotak Floating Rate Fund

  • Kotak Floating Rate Fund Direct-Growth invests its assets in floating-rate debt instruments, such as bonds, treasury bills, GOI securities, certificates of deposit, commercial papers, debentures, and non-convertible debentures. The asset size of this fund is INR 5,942 Crore as of 31st July 2022. The top holdings of this fund are GOI 22/09/2033, HDFC 30/09/2024, Power Finance Corporation 2024, 9.75% Jamnagar Utilities and Power 2024, REC 31/10/2024, 7.40% REC 26/11/2024, etc., as of 31st July 2022. The expense ratio of the fund is 0.22% as of 31st July 2022, and the exit load is zero. The Benchmark of this fund is NIFTY Short Duration Index.
  • Fund Manager – Mr Deepak Agarwal
  • Minimum Investment – INR 5,000
  • Minimum SIP Investment – INR 1,000
  • Minimum Withdrawal – INR 1,000
  • Fund’s Performance – Kotak Floating Rate Fund Direct-Growth was launched on 14th May 2019 and has delivered returns of 3.30% in 1-year, 6.56% in 3-year, and 6.68% since inception. 

Axis Floater Fund

  • Axis Floater Fund Direct-Growth invests its assets in floating-rate debt instruments, such as bonds, treasury bills, GOI securities, certificates of deposit, commercial papers, debentures, and non-convertible debentures. The asset size of this fund is INR 779 Crore as of 31st July 2022. The top holdings of this fund are 5.74% GOI 15/11/2026, GOI 22/09/2033, 7.59% GOI 2026, Tata Capital Financial Services 2024, 6.10% Sundew Properties 28/06/2024, 8.27% Tamilnadu State 13/01/2026, 8.67% Karnataka State 24/02/2026, etc., as of 31st July 2022. The fund’s expense ratio is 0.25% as of 31st July 2022, and the exit load is zero. The Benchmark of this fund is CRISIL Low Duration Debt.
  • Fund Manager – Mr Aditya Pagaria and Mr Hardik Shah
  • Minimum Investment – INR 5,000
  • Minimum SIP Investment – INR 1,000
  • Minimum Withdrawal – N.A.
  • Fund’s Performance – Axis Floater Fund Direct-Growth was launched on 26th July 2021 and has delivered returns of 4.24% in 1-year and 4.27% since inception. 

DSP Floater Fund

  • DSP Floater Fund Direct-Growth invests its assets in floating-rate debt instruments, such as bonds, treasury bills, GOI securities, certificates of deposit, commercial papers, debentures, and non-convertible debentures. The asset size of this fund is INR 1,513 Crore as of 31st July 2022. The top holdings of this fund are 6.51% GOI 2024, 6.51% GOI 2024, 5.22% GOI 15/06/2025, Reserve Bank of India 364-D 08/06/2023, 6.69% Madhya Pradesh State 17/03/2025, etc., as of 31st July 2022. The fund’s expense ratio is 0.25% as of 31st July 2022, and the exit load is zero. The Benchmark of this fund is CRISIL Short Term Bond Index.
  • Fund Manager – Mr Kedar Karnik and Mr Laukik Bagwe
  • Minimum Investment – INR 500
  • Minimum SIP Investment – INR 500
  • Minimum Withdrawal – INR 500
  • Fund’s Performance – DSP Floater Fund Direct-Growth was launched on 19th March 2021 and has delivered returns of 2.70% in 1-year and 3.89% since inception. 

Frequently Asked Questions

Since floater or floating-rate funds invest 65% of their AUM (Asset Under Management) in floating-rate bonds, they are relatively more stable than pure equity funds. These funds deliver inflated returns when the RBI (Reserve Bank of India) increases the REPO (Repurchasing Option) rate. So, any conservative investor looking for steady capital growth can invest in floater funds.

The expense ratio reduces the adequate profit of a mutual fund. Fortunately, floater funds’ expense ratios are some of the lowest among funds. Generally, direct growth floater funds’ expense ratio hovers between 0.22% and 0.60%.

Floater funds are taxed like any debt fund. For instance, you must pay an LTCG (Long Term Capital Gains) tax of 20% with indexation if you sell your units after three years from the investment date. However, if you sell your units before three years, it will be treated as STCG (Short Term Capital Gains), and the income will get added to your taxable income.

A quick look at the best floater mutual funds reveals that these funds generally deliver annualised returns between 6% and 8.50%. However, checking a floater fund’s historical returns is good before investing.

Exit load refers to the amount an investor pays for withdrawing money before a specific period. Floater mutual funds do not have any entry or exit load, so that you can enter or exit as often and whenever you want.

UTI Floater Fund, HDFC Floating Rate Debt Fund, Aditya Birla Sun Life Floating Rate Fund, Franklin India Floating Rate Fund, and ICICI Prudential Floating Interest Fund are some of the top floater mutual funds in India.

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