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Floating Rate Bond Funds: Definition, Types, Features and Benefits
A majority of debt funds in India invest in bonds that have a fixed rate of return. However, there are other types of bonds that a debt fund can invest in, such as, floating rate bonds, zero coupon bonds,
etc. The category of mutual fund that primarily invests in bonds with floating interest rate are termed as floater funds or floating rate bond funds. Read on to know more about how floating rate funds work, their features and their investment benefits.
...Read MoreDisclaimer
: In Unit Linked Policies, the investment Risk in the investment portfolio is borne by the policyholder.

Written by
Abhishek Chakravarti
: Reviewed by
Sahil Rawal

Sahil Rawal
BFSI Expert
Sahil Rawal is a digital & brand management specialist with over 10 years of experience in Financial Services Industry. Life insurance professional with expertise in digital marketing strategy, website content marketing and brand communication designed to increase brand awareness, drive engagement & sales.
What are Floating Rate Bond Funds?

A floating rate debt fund is a type of debt fund that primarily invests over 65% of its overall assets in floating rate instruments. These floating rate instruments can include corporate bonds, collateralized debt such as loans from companies that have variable or floating interest rates. Unlike fixed-rate instruments, floater funds do not have a predetermined coupon rate, so their returns can vary over time.
The interest rate of floating rate bond funds is primarily determined by fluctuating interest rates in the market. Any changes in the repo rate set by the Reserve Bank of India (RBI) can also impact the returns of these debt instruments. Each floating rate instrument is associated with a specific benchmark, and as the benchmark rate changes, the interest rate of these financial instruments changes accordingly.
When the market lending rate like repo rate surges, the interest rate of floating floater funds also rises, leading to higher returns reflected in the Net Asset Value (NAV) units of these funds. Consequently, these funds aim to capitalise on the opportunity presented by fluctuating interest rates.
As companies observe an increase in repo rates, they tend to raise the interest rates on their debt securities to create significant demand in the market. This becomes necessary because individuals tend to favour government securities when repo rates rise, as they offer comparatively higher returns. As a result, the demand for debt instruments issued by listed companies, such as bonds in India, decreases, leading to a decline in their market prices.
To address this situation and ensure sufficient cash flow for their operational costs, businesses opt to issue debt securities with variable return rates. By offering these securities with variable interest rates, companies can gather the necessary funds despite the changing market conditions caused by fluctuating repo rates. Thus, Investors may choose to invest in these funds when interest rates are surging in the country.
What are the Types of Floating Rate Bond Funds?
Floater funds can be categorised into two types:
Short-term Floater Funds
These funds primarily invest in debt securities with shorter maturities. They often focus on high-liquidity tools like T-Bills, certificate of deposits and government securities.
Long-term Floater Funds
In contrast to short-term floater funds, these funds have a more diversified portfolio mix. They invest in instruments with floating rates while also allocating a significant portion of their investments to fixed-interest instruments.
What are the Features and Benefits of Investing in Floater Funds?
Floating rate bond funds have several features and benefits. Find about them below:
Diversified portfolio
Long-term portfolio diversification is crucial. The portfolio of a floater fund includes a combination of both floating rate instruments and fixed-income securities, with the majority allocated to floating rate securities. These floating rate instruments tend to deliver better returns in times of rising interest rates. The remaining portion of the fund is invested in fixed-income securities.
Open-Ended Schemes
Typically, floating rate bond funds are open-ended mutual funds, which means there are no restrictions on investments. If you are interested in acquiring NAV units of these funds, you can do so at any time, based on the trading value depending on the underlying assets' current value. This is in contrast to closed-ended funds, which come with limitations and must be traded during their New Fund Offer (NFO) period.
Low Risk
Floater funds primarily invest in debt instruments, making them relatively low-risk option as compared to equity mutual funds. These debt mutual funds are well-suited for risk-averse individuals seeking to safeguard their principal investment.
Compared to equity instruments, floater funds carry less risk, making them an attractive investment choice for individuals with a lower risk tolerance.

Market Linked Returns
Debt securities provide a secure principal investment, but they also offer the potential for higher returns through stock market interest rate variations. By investing in such instruments during a rising stock market trend, investors can achieve significant returns on their investments, benefiting from higher compounded interest on their total deposits.
This approach enables individuals to take advantage of market fluctuations, leading to potential capital gains or periodic dividend yield pay-outs without being exposed to the risks associated with equity investments.
What are the Limitations of Floating Rate Bond Funds?
The main limitation of investments in a floating rate bond fund is its heavy reliance on current market conditions. Returns received from these funds are highly influenced by changes in repo rates, which are determined by the RBI based on the country's current economic situation. As a result, it becomes challenging to predict the returns from floater debt securities in advance, thus increasing the risk associated with these investments.
How are Floating Rate Bond Funds Taxed?
For floating rate bond funds, any short-term or long-term capital gains offered from the sale of securities are subject to taxation rules of mutual funds designated as non-equity schemes. If the fund is held for a duration less than three years, short-term capital gains tax (STCG) is applicable based on the individual's income tax slab.
On the other hand, long-term capital gains are applicable when a securities resale occurs after holding them for a minimum of three years or more. In this case, a tax of 20% is imposed on the total gains after adjusting for indexation. However, in case of floater fund units purchased on or after 1st April, 2023, long term returns are also taxed as per the income tax slab of the investor after adding the gains under the head “income from other sources”.FAQs Related to Floating Rate Debt Funds

How often does the coupon rate of floating rate bonds change?
Can hybrid schemes invest in floating rate bonds?
What are investments of floating rate bond funds other than floating rate bonds?
Are floater bond funds suitable for short-term investment?
Are floater funds risky?
ARN NO: Oct23/Bg/02J
Source:
www.indiainfoline.com/knowledge-center/mutual-funds/what-is-floater-fund-definition-characteristics-and-types
groww.in/p/debt-funds/floater-fund
scripbox.com/mutual-fund/floater
www.etmoney.com/mutual-funds/debt/floater/
www.indiainfoline.com/knowledge-center/mutual-funds/what-is-floater-fund-definition-characteristics-and-types
groww.in/p/debt-funds/floater-fund
scripbox.com/mutual-fund/floater
www.etmoney.com/mutual-funds/debt/floater/
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