Floater Fund refers to a specific category of debt mutual funds.
1.Investment Objective: The primary objective of Floater Funds is to invest in floating rate debt instruments. These instruments have interest rates that fluctuate with changes in the benchmark rates, such as the RBI repo rate, T-Bill rates, or other applicable benchmark rates.
2.Types of Investments: Floater Funds primarily invest in:
-Floating Rate Bonds: These are debt securities where the interest rate periodically adjusts according to a specified benchmark.
-Money Market Instruments: Such as Treasury Bills (T-Bills), Commercial Papers (CPs), and Certificates of Deposit (CDs) with floating rates.
3.Interest Rate Sensitivity: Floater Funds are designed to be less sensitive to changes in interest rates compared to traditional fixed-rate debt funds. This is because the interest income adjusts upwards or downwards with changes in benchmark rates, thereby potentially reducing interest rate risk.
4.Risk Profile: Typically, Floater Funds are considered to have a lower interest rate risk compared to funds that invest in fixed-rate debt instruments. However, they are still subject to credit risk (risk of default by issuers), liquidity risk, and market risk.
5.Investor Profile: Floater Funds may appeal to investors who are seeking a relatively stable income stream with potential protection against rising interest rates. They are also suitable for investors looking to diversify their debt portfolio beyond fixed-rate instruments.
6.Returns: Returns from Floater Funds are closely linked to prevailing interest rates. When benchmark rates rise, the interest income from the fund's investments increases, potentially leading to higher returns. Conversely, when benchmark rates fall, returns may decrease.
7.Taxation: From a tax perspective, the gains from Floater Funds are treated as either short-term or long-term capital gains depending on the holding period (less than or more than three years). Short-term gains are taxed at the investor's applicable income tax rate, while long-term gains are taxed at 20% with indexation benefits.
It's important for investors to carefully consider their investment objectives, risk tolerance, and investment horizon before investing in Floater Funds or any other mutual fund category. Consulting with a financial advisor or fund manager can provide tailored advice based on individual circumstances.