What Are Floating Rate Funds? Meaning, Types, and Features

Floating rate funds are a special type of mutual funds which invest in financial instruments with variable or floating rate of interest. Basically, floating rate funds are debt-based mutual funds which invest in securities such as bonds, loans, and other debt instruments. Usually, floating rate funds are able to provide stable, predictable returns over the time.

Typically, there are two common types of floating rate funds – short-term floating rate funds and long-term floating rate funds. Short-term floating rate funds provides greater liquidity to the investors by offering short-term maturity period. On the other hand, long-term floating rate funds compel the investors to stay invested for a longer period of time.

Following are the basic features of floating rate funds:

• Low risks Since these are debt-based mutual funds, they carry lower risks as compared to their equity counterparts. Therefore, these funds are more suited for risk-averse investors who want to earn decent returns but are looking for a relatively safer investment avenue.
• High returns In the long run, floating rate funds are able to deliver higher returns than most of the fixed-return instruments and debt investments. At a time when the interest rates are rising in the market, these funds are able to provide very good returns to the investors.
• Open-ended schemes Floating rate funds are usually open-ended schemes which means that the investor can invest in them as per their needs, financial objectives, and investment horizon.

The taxation system for floating rate funds is same as it is for any other debt mutual fund in India. If an investor holds these funds for less than 3 years, taxation rules for short-term capital gains are applicable. Whereas, in case these funds are held for more than 3 years, they’re taxed as per long-term capital gains.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.