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Overview
Floating Rate Funds are debt mutual funds that predominantly invest in securities whose interest rates can reset periodically.
Because coupon rates can reset, floating-rate instruments can behave differently from conventional fixed-rate bonds when market interest rates change.
These funds can be useful for investors seeking debt exposure with a meaningful floating-rate component, but they still carry credit, liquidity, derivative, and market risks.
Explained
A Floating Rate Fund is an open-ended debt scheme that predominantly invests in floating-rate instruments.
A floating-rate security does not necessarily pay the same interest rate throughout its life.
Instead, the rate can reset according to a specified benchmark and schedule.
For example, a bond's coupon might be linked to a market reference rate plus a predefined spread.
When the benchmark changes, the coupon can reset accordingly.
The qualifying exposure can also include permitted structures that convert fixed-rate exposure into floating-rate exposure using derivatives.
Explained
The fund builds a portfolio in which a significant proportion of interest-rate exposure can reset over time.
Suppose a floating-rate bond pays:
This feature can reduce some of the price sensitivity associated with holding a fixed-rate bond when market rates rise.
However, Floating Rate Funds are not immune to losses.
Returns can still be influenced by:
Suitability
Floating Rate Funds may suit investors who:
They should not be considered guaranteed winners whenever policy rates rise.
Advantages
Floating-rate instruments can adjust their interest payments as benchmark rates change.
Because coupons reset, certain floating-rate securities may experience less price pressure than comparable fixed-rate securities when market yields rise.
Fund managers select eligible floating-rate securities and can use permitted instruments to create floating-rate exposure.
A fund can spread investments across issuers and instruments.
Floating-rate exposure can be attractive when interest rates are rising or expected to remain elevated, although actual returns depend on broader portfolio factors.
Before you invest
The portfolio may still contain other permitted securities, and floating-rate instruments can themselves have duration and reset-period effects.
A security that resets every three months can behave differently from one that resets less frequently.
Understand which reference rates influence the portfolio's floating-rate securities.
Higher coupons do not compensate for every credit risk. Review the credit-rating distribution and issuer concentration.
Some fixed-rate securities may be converted into floating-rate exposure through swaps or other permitted derivatives. These positions add operational and derivative-related considerations.
When benchmark rates fall, coupons on floating-rate instruments can reset downward. That means the strategy does not benefit automatically from every interest-rate environment.
Portfolio YTM should not be interpreted as the return an investor is certain to earn.
Taxation
Floating Rate Funds predominantly invest in debt and debt-related instruments.
Where they satisfy the Section 50AA definition of a Specified Mutual Fund, relevant units acquired on or after April 1, 2023 can receive deemed short-term capital-gain treatment regardless of the actual holding period.
Such gains are generally taxed at the investor's applicable rate, subject to prevailing provisions.
Investors should verify current tax rules before redemption.
Step by step
Good to know
It is an open-ended debt scheme that predominantly invests in floating-rate securities or permitted instruments used to create floating-rate exposure.
It is a debt security whose interest rate can reset periodically according to a specified benchmark or formula.
They may benefit from coupons resetting higher, but total returns still depend on credit quality, spreads, duration, expenses, and market conditions.
Coupons on floating-rate securities may reset lower, reducing future interest income.
No. They carry credit, liquidity, interest-rate, derivative, and market risks.
Floating Rate Funds focus predominantly on floating-rate exposure. Dynamic Bond Funds actively move across duration based on the manager's interest-rate strategy.
Recap
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FUND
Axis Floating Interest Rates Fund Direct GrowthDebt Floating Rate₹1426.49
0.1%
7.41%
8.41%
7.22%
Franklin India Floating Interest Rates Direct GrowthDebt Floating Rate₹48.19
0.01%6.94%
8.2%
7.21%
I
ICICI Prudential Floating Interest Rates Fund Direct Plan Reinvestment Inc Dist cum Cap Wdrl OthersDebt Floating Rate₹214.75
0.1%6.86%
7.92%
7.05%
Bandhan Floating Interest Rates Fund Direct GrowthDebt Floating Rate₹14.25
0.1%6.85%
7.89%
6.79%
DSP Floating Interest Rates Fund Direct GrowthDebt Floating Rate₹14.32
0.06%5.68%
7.87%
6.7%
Kotak Floating Interest Rates Fund Direct GrowthDebt Floating Rate₹1668.17
0.09%6.18%
7.79%
6.72%
HDFC Floating Interest Rates - Direct Plan - Growth OptionDebt Floating Rate₹54.89
0.1%6.24%
7.64%
6.86%
SBI Floating Interest Rates Fund Direct Quarterly Reinvestment Inc Dist cum Cap WdrlDebt Floating Rate₹14.49
0.03%6.53%
7.63%
6.74%
Nippon India Floater Fund Direct Plan Weekly Payout Inc Dist cum Cap WdrlDebt Floating Rate₹10.25
0.11%5.75%
7.52%
6.56%
T
Tata Floating Rate Fund Direct GrowthDebt Floating Rate₹13.99
0.08%6.68%
7.51%
6.77%
Axis Floating Interest Rates Fund Direct Monthly Reinvestment Inc Dist cum Cap WdrlDebt Floating Rate₹1007.3
0.1%7.41%
8.38%
7.18%
Aditya Birla Sun Life Floating Interest Rates Fund Direct Plan GrowthDebt Floating Rate₹385.44
0.05%6.33%
7.49%
6.76%
I
ICICI Prudential Floating Interest Rates Fund Direct Plan Weekly Reinvestment Inc Dist cum Cap WdrlDebt Floating Rate₹102.2
0.1%6.85%
7.87%
6.96%
Bandhan Floating Interest Rates Fund Direct Monthly Payout of Income Distribution cum cptl Wdrl optDebt Floating Rate₹10.16
0.1%6.01%
7.56%
6.58%
DSP Floating Interest Rates Fund Direct Payout of Income Dist cum Cap WdrlDebt Floating Rate₹14.32
0.06%5.68%
7.87%
6.7%
Kotak Floating Interest Rates Fund Direct Monthly Reinvestment of Income Distribution cum Cap WdrlDebt Floating Rate₹1453.17
0.09%6.17%
7.79%
6.72%
UTI Floating Interest Rates Fund Direct Annually Reinvestment Inc Dist cum Cap WdrlDebt Floating Rate₹1542.79
0.06%6.46%
7.16%
5.97%
SBI Floating Interest Rates Fund Direct GrowthDebt Floating Rate₹14.49
0.03%6.53%
7.63%
6.74%
Nippon India Floater Fund Direct Plan Weekly Reinvestment Inc Dist cum Cap WdrlDebt Floating Rate₹10.25
0.11%5.75%
7.52%
6.56%
T
Tata Floating Rate Fund Direct Monthly Reinvestment of Income Distribution cum capital withdrawalDebt Floating Rate₹13.99
0.08%6.68%
7.51%
6.77%
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