What are floating funds? – The economic context

Float funds can be used as a proxy to park your funds before they are routinely moved into equity mutual funds. Have you ever wondered if these floating funds themselves could be a viable asset class to consider for investing in the short to medium term? In this article, we understand the meaning of floating funds and the mechanism by which they could complement your portfolio.

What are floating funds?

A floating fund is a fund that invests in debt-oriented financial instruments, they offer you a “variable” or “floating” rate of interest and hence the name. They invest in a range of debt instruments such as corporate bonds, treasury bills and certificates of deposits etc., the choice of investments would depend on the interest rate cycle and corresponding economic cycle.

Unlike other mutual funds such as bond funds, these instruments attempt to generate higher returns by taking advantage of interest rate fluctuations. Returns on floating funds may vary depending on market interest rates. For example, in the event that interest rates in the debt market were to rise, floating funds could also see a corresponding increase in returns. There are numerous floating funds offered by various AMCs across India, giving investors the flexibility to choose the one that best suits their needs.

Advantages of floating funds

By now it is quite evident that float funds are different from other mutual funds such as bond funds which specifically invest in bonds and gilt funds which focus on debt securities issued by the government. Floating funds play a bigger role, here let’s take a look at the main features:

  1. Wider basket of debt instruments:
    Floating funds seek to invest in debt securities aligned with the floating interest rate design. During a favorable trend in interest rates, they enable the fund to generate higher than normal returns. A certain part of the portfolio is dedicated to fixed income securities, in order to ensure that the portfolio does not suffer from an unfavorable evolution of interest rates on the market.

    In the long term, this diversified portfolio built by float funds could enable the fund to generate commensurate returns for investors.

  2. Relatively less risky:
    Debt mutual funds, in general, are aimed at investors with a comparatively lower appetite for risk. Floating bottoms are relatively less risky than other fund categories such as equity funds and hybrid mutual funds that provide exposure to highly volatile equity markets.

    It is imperative to understand that there is an element of credit risk in floating funds. This basically means that there is a chance that the bond issuer could default on payments.

  3. Alternative to traditional debt instruments:
    Float funds may offer better returns than fixed interest rate debt securities. If interest rates are expected to rise, then investors might consider placing funds in this path to take advantage of the rising interest rate scenario. On the contrary, if the interest rate outlook is bleak, then one can choose to park in other debt mutual funds that have a fixed interest rate.
  4. Taxation:
    For short-term capital gains (less than 36 months holding), the tax is levied at the investor’s slab rate.

For long-term capital gains, the tax is applicable at 20% with an indexation benefit (excluding applicable surcharge and cess). The indexation benefit is the inflation adjustment mechanism that helps reduce tax payable.

There are so many more variable rate funds than discussed here, but this should give you a fair idea of ​​the category.


An investor education initiative.

to learn more about the process for completing a unique know-your-client (KYC) requirement for investing in mutual funds. Investors should only deal with registered mutual funds, details of which can be checked on the SEBI website
. For questions, complaints and grievance redress, investors may contact the AMCs and/or the Investor Relations Officers. In addition, investors can also file complaints on
if they are not satisfied with the resolutions given by the AMCs. The SCORES portal allows you to file your complaint online with SEBI and then view its status.

Investments in mutual funds are subject to market risk, read all plan documents carefully.


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