Best Floater Rate Funds in NSE India for 2024
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A floater fund is a specialised type of debt mutual fund. It primarily allocates about 65% of its assets to floating-rate debt instruments, typically corporate bonds. Unlike government bonds offering fixed interest rates, corporate bonds provide fluctuating rates. However, these funds may also include government securities in their portfolios. A floater fund’s performance is closely tied to the Repo (Repurchasing Option) rate established by the Reserve Bank of India (RBI). This article will delve deep into the meaning of floater funds and provide an educational list of funds to consider in 2024!
Top 10 Floater Rate Funds to Invest in 2024
Here is an educational list of the top 10 floater rate funds in the Indian stock market for 2024. These funds have been sorted according to their 5-yr CAGR:
Fund Name | AUM (in Cr) | Expense Ratio (in %) | 1Y Returns | 3Y CAGR | 5Y CAGR |
---|---|---|---|---|---|
ICICI Pru Floating Interest Fund | ₹9,557.71 | 0.56 | 8.66% | 6.77% | 7.50% |
Nippon India Floating Rate Fund | ₹7,817.10 | 0.31 | 8.04% | 6.05% | 7.15% |
Kotak Floating Rate Fund | ₹4,176.26 | 0.24 | 8.24% | 6.23% | 7.04% |
HDFC Floating Rate Debt Fund | ₹15,189.39 | 0.26 | 8.36% | 6.53% | 7.00% |
Aditya Birla SL Floating Rate Fund | ₹12,399.83 | 0.23 | 7.94% | 6.35% | 6.70% |
Franklin India Floating Rate Fund | ₹300.22 | 0.23 | 8.92% | 6.75% | 6.53% |
UTI Floater Fund | ₹1,367.69 | 0.42 | 7.45% | 5.85% | 6.28% |
SBI Floating Rate Debt Fund | ₹1,126.76 | 0.26 | 8.63% | 6.42% | - |
Bandhan Floating Rate Fund | ₹277.49 | 0.31 | 8.00% | 6.06% | - |
DSP Floater Fund | ₹891.77 | 0.25 | 9.10% | 6.41% | - |
Disclaimer: Please note that the above list is for educational purposes only, and is not recommendatory. Please do your own research or consult your financial advisor before investing.
Note: The data on this list of the best floating rate mutual funds is from 19th August 2024, and the data is derived from Tickertape Mutual Fund Screener.
🚀 Pro Tip: You can use Tickertape’s Mutual Fund Screener to research and evaluate funds with over 50+ pre-loaded filters and parameters.
Overview of the Floater Rate Funds in India (2024)
Here is a brief overview of the top floater rate funds listed above:
ICICI Pru Floating Interest Fund
ICICI Prudential Floating Interest Fund is a floater mutual fund scheme by ICICI Prudential Mutual Fund. As of 19th August 2024, it manages assets worth Rs. 9,557.71 cr., positioning it as a medium-sized fund in its category. With an expense ratio of 0.56%, the ICICI Prudential Floating Interest Fund bears a slightly higher cost than its peers in the floater funds segment. The fund has a 5-yr CAGR of 7.50% and a 3-yr CAGR of 6.77%. Additionally, the fund’s 1-yr return is 8.66%.
Nippon India Floating Rate Fund
Nippon India Floating Rate Fund is a mutual fund scheme by Nippon India Mutual Fund. As of 19th August 2024, the fund manages assets worth Rs. 7,817.10 cr., positioning it as a medium-sized fund in its category. The fund has an expense ratio of 0.31%, comparable to typical rates for similar funds, and it offers competitive management fees. The fund’s 5-yr CAGR is 7.15%, and its 3-yr CAGR is 6.05%. Additionally, the fund has 1-yr returns of 8.04%.
Kotak Floating Rate Fund
Kotak Mahindra Mutual Fund offers the Kotak Floating Rate Fund Direct Growth. It is a floater mutual fund scheme launched on 5th September 2019. The fund has Rs. 4,176.26 cr. in assets under management (AUM) as of 19th August 2024. It has an expense ratio of 0.24%, and it stands as a mid-size fund in its category. Furthermore, the fund has a 5-yr CAGR of 7.04%, and it has a 3-yr CAGR of 6.23%. Additionally, the fund has 1-yr returns of 8.24%.
HDFC Floating Rate Debt Fund
HDFC Mutual Fund offers the HDFC Floating Rate Debt Fund Direct Growth. It is a Floater mutual fund scheme. As of 19th August 2024, the fund manages assets worth Rs. 15,189.39 cr., positioning it as a medium-sized fund in its category. The fund has an expense ratio of 0.26%, comparable to other similar Floater funds. The fund has a 5-yr CAGR of 7.00%, and its 3-yr CAGR is 6.53%. Additionally, it has 1-yr returns of 8.36%.
Aditya Birla SL Floating Rate Fund
The ABSL Floating Rate Fund is a floater mutual fund scheme managed by Aditya Birla Sun Life Mutual Fund. As of 19th August 2024, the fund had Rs. 12,399.83 cr. in assets under management (AUM). It falls into the medium-sized fund category. The fund carries an expense ratio of 0.23%, aligning closely with industry standards for similar floater funds. Furthermore, the fund has a 5-year CAGR of 6.70%, a 3-year CAGR of 6.35%, and 1-year returns of 7.94%.
Franklin India Floating Rate Fund
Franklin Templeton Mutual Fund offers the Franklin India Floating Rate Fund. As of 19th August 2024, it holds assets under management (AUM) worth Rs. 300.22 cr., positioning it as a medium-sized fund within its category. It has an expense ratio of 0.23%, aligning closely with typical charges in similar floater funds. The fund has a 5-yr CAGR of 6.53%, and its 3-yr CAGR is 6.75%. Additionally, the fund has 1-yr returns of 8.92%.
UTI Floater Fund
UTI Mutual Fund introduced the UTI Floater Fund scheme on 12th October 2018. The fund has assets under management (AUM) amounting to Rs. 1,367.69 cr. as of 19th August 2024. It is classified as a medium-sized fund within its category. The fund has an expense ratio of 0.42%, aligning closely with typical charges in the Floater funds domain. Furthermore, the fund has a 5-yr CAGR of 6.28% and a 3-yr CAGR of 5.85%. Additionally, the fund has 1-yr returns of 6.28%.
SBI Floating Rate Debt Fund
SBI Mutual Fund offers the SBI Floating Rate Debt Fund Direct Plan Growth. It is a floating-rate mutual fund scheme that was launched on 6th October 2020. As of 19th August 2024, the fund manages assets worth Rs. 1,126.76 cr., positioning it as a medium-sized fund within its category. The fund has an expense ratio of 0.26% and this closely aligns with industry standards for similar floating rate funds. The fund has a 3-yr CAGR of 6.42%, and 1-yr returns of 8.63%.
Bandhan Floating Rate Fund
Bandhan Mutual Fund offers the Bandhan Floating Rate Fund. It is a floater mutual fund scheme launched on 10th February 2021. As of 19th August 2024, the fund holds assets under management (AUM) valued at Rs. 277.49 cr., positioning it as a medium-sized fund in its category. Its expense ratio stands at 0.31%, aligning closely with the standard rates observed across similar floater funds. The fund has a 3-yr CAGR of 6.06% and 1-yr returns of 8.00%.
DSP Floater Fund
DSP Mutual Fund offers the DSP Floater Fund. It is a mutual fund scheme established on 4th March 4 2021. As of 19th August 2024, this fund holds assets under management worth Rs. 891.77 cr., positioning it as a medium-sized fund within its category. The fund has an expense ratio of 0.25%, which is comparable to industry standards. Furthermore, the fund has a 3-yr CAGR of 6.41% and 1-yr returns of 9.10%.
How to Invest in Floater Rate Funds?
Investing in floater rate funds can be a straightforward process. Here’s a guide to get you started:
- Open a demat/trading/brokerage account. Investors can open a demat account with smallcase!
- Register online at any AMC website.
- Explore different arbitrage mutual funds to figure out which one suits your investment objectives.
- Investors can use tools like the Tickertape Mutual Fund Screener to sort through these float funds and explore their fundamentals and past performance. They can also sort through the 200+ filters available to track fund performance.
- Proceed to invest by clicking on the appropriate option and specifying the amount and investment mode (SIP or Lumpsum).
- Submit your KYC details, including your PAN number and bank details, to finalise your investment.
Note: It is important to conduct thorough research and consult a financial advisor before investing in anything.
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How do Floater Rate Funds Work?
Floater rate funds comprise various investments like preferred stock, corporate bonds, and loans with maturities ranging from one month to five years. These funds may include corporate loans and mortgages. Floating rate loans, provided by banks to companies, are often repackaged for investors. They are akin to mortgage-backed securities, offering a collective rate of return from multiple mortgage rates in the fund.
Considered senior debt, floating rate loans hold precedence in claiming a company’s assets in the event of default. Although “senior” doesn’t denote credit quality, it is instead the order of asset claim. Additionally, floater rate funds may incorporate floating rate bonds, where interest adjusts over time. The bond’s rate is often linked to the fed funds rate, set by the Federal Reserve Bank, with an added spread. As interest rates climb, so does the return on the floater rate bond fund.
Types of Floater Rate Funds
Floater rate funds encompass two primary categories:
- Short-term Floater Funds: These floater debt funds focus on debt securities with shorter maturities, typically investing in highly liquid instruments like government securities, deposit certificates, and T-Bills.
- Long-term Floater Funds: Distinguished by a more diversified portfolio, these funds invest in floating interest instruments alongside substantial allocations to the money market or fixed interest instruments.
Features of Floater Rate Funds
Here are a few of the key features of floater rate funds:
- Open-ended Structure: Floater funds are typically open-ended, allowing investors to enter and exit at their discretion.
- Diversification: These funds provide robust diversification opportunities by investing approximately 65% of assets in floating-rate debt instruments and the remainder in fixed-income instruments. This allocation ensures potential value appreciation when interest rates rise, serving as a hedge against equity market declines.
- Low Risk: Floater funds exhibit lower volatility compared to aggressive debt or equity funds due to their reliance on fixed-income instruments. However, like other debt funds, they carry credit risks. Managers often mitigate this risk by selecting high-quality bonds for investment, minimising the impact of potential issuer defaults on investors’ portfolios.
Who Should Invest in Floater Rate Funds?
Floater funds are a type of debt fund that invests in floating-rate corporate bonds, money market instruments, and government securities, with returns linked to interest rate fluctuations. Indian citizens can invest in floater funds through a portfolio manager. Typically, investors who analyse and predict interest rate movements, seek portfolio diversification, prefer stable investments, desire tax efficiency, maintain a long-term investment horizon, or aim to understand debt fund dynamics can find floater rate funds ideal.
These funds offer stability compared to equity or aggressive debt funds and invest in high-quality debt instruments, minimising volatility. However, liquid funds or other open-ended debt funds might be more suitable for short-term investors. Floater funds also provide an educational opportunity for first-time investors to grasp the dynamics of debt funds and the broader secondary market, particularly regarding interest rates.
When to Invest in Floater Rate Funds?
Investing in a debt floater mutual fund can be the most advantageous when a country’s interest rates rise. This typically occurs during persistent inflation, prompting a contractionary monetary policy that elevates repo rates, subsequently affecting other linked rates. Parking surplus funds in floater funds during such market conditions can yield significant returns on investment.
Understanding the characteristics of debt floater mutual funds and identifying opportune investment moments is crucial for investors. Moreover, aligning the investment tenure with anticipated market conditions and personal financial objectives enhances decision-making.
How do Floater Rate Funds Generate Returns?
Floater funds generate returns for investors primarily through interest income on debt securities and valuation changes. Interest income is accrued daily in the portfolio, while periodic payments are made by issuer companies. Favourable changes in credit spreads for issuer companies can lead to an improved debt portfolio valuation, resulting in investors’ gains. When a company’s credit rating improves, the credit risk premium decreases, making existing debt securities more favourable and providing mark-to-market gains to the portfolio.
Interest Rates on Floater Rate Funds
Market fluctuations in interest rates heavily influence the return on investment of a floater mutual fund. Changes in the repo rates set by the Reserve Bank of India directly affect the returns of zero-risk securities, government bonds, and bonds issued by public limited companies.
When the repo rate increases, the returns on zero-risk instruments and government bonds rise, consequently boosting the yield of a debt floater mutual fund. Additionally, companies increase the interest rates on their debt securities to attract demand in the market. However, when repo rates rise, investors tend to favour government securities for higher returns, reducing demand for debt tools from listed companies and lowering their prices. To maintain cash flow, companies issue debt securities with fluctuating return rates.
As a result, an increase in the repo rate increases the returns on all market-linked debt securities. Investing in a floater debt fund, primarily consisting of such instruments, means subjecting oneself to fluctuating yields and net asset value (NAV) in response to interest rate changes.
In times of rising market interest rates, the returns from a floater fund increase, making it a profitable investment choice. This rise often leads to capital gains for investors reflected in the NAV units of such funds.
Benefits of Investing in Floater Rate Mutual Funds
Floater mutual funds offer several advantages, including:
- Low Risk: These funds primarily invest in bonds, government securities, and fixed income instruments. This can minimise the risk of capital loss.
- Possibly High Returns: Floater funds are designed to minimise risk while maximising profits. The fixed income component can generate steady returns, while the floating-rate component can foster capital growth.
- Accessibility: Starting investments in floater funds can be accessible, with minimum investments as low as Rs. 500. Options include lump-sum investments of Rs. 5,000 or more and Systematic Investment Plans (SIP) starting from Rs. 500 monthly.
- Diversification: Floater funds offer a tool for diversifying capital investments, providing a balance between high-risk instruments and fulfilling financial obligations.
Risks of Investing in Floater Rate Funds
Investors typically favour floater funds due to their lower risk profile compared to more aggressive debt and equity funds. However, investing in floater funds carries several risks:
- Interest Rate Dependency: Floater fund returns are closely tied to benchmark interest rates set by the Reserve Bank of India. Any reduction in these rates can lead to losses, negatively impacting corporate bonds and government securities. Therefore, a thorough analysis of India’s macroeconomic scenario is essential before investing in floater funds.
- Credit Risk: Despite fund managers’ careful selection of debt instruments, there’s always a risk of rating downgrades or defaults by issuers. A downgrade in ratings can diminish the fund’s value, while defaults can significantly impact returns.
- Lack of Control: Investors have control over their investment amount but rely on the fund manager’s expertise in selecting debt instruments. Therefore, evaluating the fund manager’s reputation and track record can be crucial when choosing a floater fund.
Investors should be aware of these risks and conduct thorough research before investing in floater funds.
Taxation on Floater Mutual Funds as per the 2024 Budget
Understanding the latest tax regulations on debt mutual funds is crucial when considering flotaer rate funds, as they are debt funds. The Union Budget 2024 has introduced significant changes to the taxation of debt mutual funds. Here is a detailed breakdown of the new tax rules:
Short-Term Capital Gains (STCG)
If you sell your debt fund units within three years (36 months), the gains from these investments are considered short-term capital gains. According to the new budget, these gains will be taxed according to your income tax slab rate.
Long-Term Capital Gains (LTCG)
For debt funds held for over three years (36 months), the gains are categorized as long-term capital gains. The key points to note under the new budget are:
- Tax Rate: The tax rate for long-term capital gains on debt funds is now a flat 12.5%, regardless of the amount of gain.
- No Indexation Benefit: The benefit of indexation, which previously allowed investors to adjust the purchase price of their assets for inflation, has been removed for debt funds. This means that the entire gain from selling a debt fund after three years will be taxable at the flat rate of 12.5%.
Summary
Capital Gains Tax | Description |
Short-Term Capital Gains (STCG) | If you sell your debt fund units within three years (36 months), the tax will be as per your income tax slab. |
Long-Term Capital Gains (LTCG) | For debt funds held for over three years (36 months), the tax rate is now a flat 12.5% without indexation benefits. |
Factors to Consider While Investing in Floater Funds
Before diving into floater funds, consider the following key factors:
- Performance: Major mutual fund houses offer floater funds, but their performance varies. Investors can analyse historical performance over 1-year, 3-year, 5-year, and since inception to identify top-performing funds.
- Comparison of Funds on Benchmarks: Investors can compare funds against the CRISIL Low Duration Debt or NIFTY Low Duration Debt Index. Funds that consistently outperform benchmarks can be preferable.
- Expense Ratio: Investors can also check the expense ratio, typically ranging from 0.22% to 0.60% in floating rate funds.
- Taxation: It is also essential to understand the tax implications. As per the Union Budget 2024, holding investments for over three years incurs an LTCG tax of 12.5% without indexation benefits. Short-term gains will be taxed according to your income tax slab rate.
- Financial Goals: Despite being taxed as debt funds, floating funds offer competitive returns (6% to 8.50%). Due to their volatility, they are suitable for long-term goals.
- Exit Load: Unlike other funds, floater funds usually have no exit load, allowing flexible withdrawals.
- Fund Manager’s Expertise: Investors can evaluate the fund manager’s expertise in analysing interest rates and inflation, which is critical for optimising returns.
To Wrap It Up…
The rise in popularity of income-generating financial products, such as floating-rate funds, underscores the need for investors to understand alternative asset classes. Floating-rate funds can offer income investors diversification and a degree of protection against interest rate fluctuations. While they can potentially enhance returns, investors should be aware of their increased risk profile. It’s essential to assess your comfort level with these risks and avoid overexposure. Investors can also consult a financial advisor before investing.
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Frequently Asked Questions(FAQs) on Floater Rate Funds
Floater funds are debt mutual funds that invest primarily in floating-rate debt securities, such as corporate bonds with fluctuating interest rates.
Floater debt funds can have either short-term or long-term maturities. Short-term debt mutual funds typically invest in government securities with a maturity of less than a year, such as treasury bills and certificates of deposit.
Floating rate funds can offer secure investment opportunities with quality returns, making them suitable for risk-averse investors. However, despite being safer than equity funds, floating rate funds carry credit risk.
Floater funds diversify their investments across various securities like corporate bonds, government securities, and treasury bills. This strategy can mitigate credit and default risks in the portfolio.
Floater rate funds are debt mutual funds. According to the Union Budget of 2024-25, the LTCG tax rate is now a flat 12.5% without indexation benefits and STCG will be taxed according to your income tax slab.