What Does it Mean to Invest in a Floating Rate Fund?

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In the last 6 months, as of March 20, 2022, this category has seen net outflows of ₹8,440 crores. The given funds do not attract any Exit Load. Below is a detailed idea of what it means to invest in a floating rate fund.

A floating rate fund is a mutual fund that invests in debt instruments and bonds. These are financial instruments that pay a variable or floating interest rate. It comes with self-adjusting features and flexibility to the changing interest rate environment. The Current Net Asset Value of the Nippon India Floating Rate Fund as of 30 May 2022 is ₹36.1139 for the growth option of the Regular Plan. Association of Mutual Funds in India (AMFI) shows that floater funds saw a net outflow of ₹10, 323 crores, the highest in the current financial year.

In the last 6 months, as of March 20, 2022, this category has seen net outflows of ₹8,440 crores. The given funds do not attract any Exit Load. Below is a detailed idea of what it means to invest in a floating rate fund.

Floating Rate Fund Investment

This open-ended debt scheme predominantly invests in floating rate investments as per SEBI categorisation. There is a mandate of a minimum 65% investment of Total assets in floating rate instruments. These funds usually invest 70-80% of their holdings in floating-rate bank loans and the rest 20-30% are invested in things like derivatives, cash and investment-grade and junk bonds. Mutual funds use derivative instruments like Interest Rate Swaps like Overnight Index Swaps to turn fixed coupon yielding portfolios into floating rate mutual fund portfolios. Investors are encouraged to weigh the risks of investing in the funds and research the fund holdings. This is necessary since they fluctuate with rising rates.

Should You Invest in Floating Rate Funds Now?


In a 2021 monetary policy meeting, the RBI provided a calendar for Variable Reverse Rate Repo (VRRR). Although the economy was previously fragile with a slow recovery due to the massive COVID blow, it is now expected to pick up now.

Subsequently, the RBI may gradually increase the rate of interest. This will normalise the policy rates to a great extent. While most schemes will actively manage the duration risks to mitigate the interest rate rise, it is a wise idea to allocate some corpus to a floating rate fund. It usually has a base rate plus spread or margin. The yield will change as and when the repo rates rise or fall. So, floating rate fund investors can benefit through higher yields in an increasing interest rate landscape.

Benefits of Investing in Floating Rate Funds

The interest rates on securities are fixed in a typical fixed income portfolio. But floating rate funds invest in different types of fixed-income securities with different interest rates. The portfolio is diversified and the overall risk is reduced. Further, these funds are open-ended which means you have the flexibility to choose when to exit or enter the fund.

The best floating rate funds boost returns through ‘accrual’ earning. It is ideal for fixed income investors who wish to increase their yields in a rising interest scenario. Low risks as compared to their equity counterparts make it all the more suitable for risk-averse investors. But know that, if held for more than 3 years, they will be taxed as per long-term capital gains.