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Floating Rate Funds

By HARSH AGARWAL

4th Aug 2022

2 mins read

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Bonds are one of the safest investment instruments available in the market. However, their stagnant interest rate is a deal breaker for most investors who want to earn a profit. So, is there a way to groove to the interest rates of the economy while maintaining a low-risk profile?

This blog is all about that very way, the floater rate bonds! So, stay with us while the words do, and we'll try to explain the concept of these funds.

What are floating rate funds?

A floating rate fund is a type of fund that invests in financial products with variable or floating interest rates. A floating rate fund - can be an exchange-traded fund (ETF) or a mutual fund that invests in debt securities and instruments whose interest charges fluctuate based on an underlying interest rate. These debts are pegged to specific benchmarks. These funds may also include company loans and mortgages.

The benchmark rate is mostly the prime rate ( also known as the prime lending rate), which is the cheapest loan rate charged by commercial banks to their most creditworthy borrowers, mostly, large corporations or high-net-worth individuals.

The underlying interest rate is subject to quarterly revisions. The interest rate on your fund will be determined by the RBI based on various financial indicators. The interest rate on your fund will fluctuate in response to changes in the base rate.

Here are some examples of floating rate funds in India:

Examples of floating rate funds in India
Examples of Floating Rate Funds in India

Role of the Fund Manager

The fund manager decides the allocation between various debt instruments. He analyses the credit rating and the interest rate. Thus building the fund's portfolio while ensuring fulfilment of the fund's objective and checking the risk profile of the fund accordingly.

Benefits

  • Sensitivity to the rate change

Unlike other debt funds, the floater funds are susceptible to any economic interest rate changes. They reflect the same in the returns too.

  • Better than fixed rate debt funds

Seeing the inflationary pressure, one can predict that the interest rates are poised up. In such a case, the fixed rate instruments fall short of the returns that floating rate instruments offer.

Things to Consider

  • Interest rates might come down too.

Although the ten-year bond yields have been highest in the recent past, the central bank is expected to lower the yields of these bonds. This might also reduce floating bond interest rates, resulting in a lower return on floater funds.

  • Poorly rated bonds

The fund managers in the hunt for higher rates may invest in corporate bonds with a real chance of defaulting. Even AAA-rated secured bonds have been known to default in some cases.

Now you can say that you have a decent idea about floating ra We'll be back with some more finformation.

Till then, Stay Safe! Invest Safer!!

FAQs

Q. What are tax implications on the capital gains through this kind of fund?

Ans. Floating Rate Mutual Funds or Floater Funds like other debt funds are taxed as per the individuals tax slab if held for less than 3 years and at a rate of 20% with indexation for a period more than than.

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