When interest rates rise, most debt funds fall—but floating rate funds rise with them.

If you’ve ever worried about the impact of rising interest rates on your fixed-income investments, you’re not alone. Many investors, especially in debt mutual funds, face a rude shock when bond prices fall as interest rates climb.

Enter Floating Rate Funds—a lesser-known category designed to benefit from rising interest rates, not suffer because of them.

Let’s dive into what they are, how they work, and when they deserve a spot in your portfolio.

1. What Are Floating Rate Funds?

Floating Rate Funds are debt mutual funds that invest primarily in securities with variable interest rates. These rates adjust periodically based on a reference rate like:

• RBI repo rate

• MIBOR (Mumbai Interbank Offer Rate)

• Treasury bill yields

As interest rates go up, the coupon (interest payment) on these bonds also goes up, which means your returns adjust upward too.

Unlike regular bonds that lock in a fixed rate, floating rate instruments keep moving with the market—hence the name.

2. Why Floating Rate Funds Are Relevant Now

✅ Rising Rate Environment

When RBI starts hiking rates to control inflation, most debt funds suffer due to mark-to-market losses.

Floating rate funds, on the other hand, become more attractive as their yields rise along with rates.

✅ Lower Duration Risk

These funds have low sensitivity to interest rate changes, reducing the chance of negative NAV fluctuations.

✅ Flexibility and Liquidity

Most floating rate funds are open-ended, and the underlying securities are highly liquid.

✅ Alternative to Short-Term Debt Funds

They’re a smart option when you want slightly better returns than liquid or short-duration funds, with less interest rate risk.

3. How Floating Rate Funds Compare to Other Debt Funds

4. What’s Inside a Floating Rate Fund?

• Floating Rate Bonds (FRBs) issued by the government or corporates

• Instruments with interest linked to benchmarks like repo or treasury yields

• Some may use interest rate swaps or derivatives to mimic floating-rate exposure even if the instrument is fixed

This hybrid strategy allows fund managers to maintain a dynamic interest rate profile—even if suitable pure floating bonds are not available.

5. Ideal Investor Profile for Floating Rate Funds

✅ You’re looking for low-volatility debt options

✅ You want to protect returns in a rising interest rate environment

✅ Your time horizon is 6–24 months

✅ You want an upgrade over liquid funds without major risk

6. What to Watch Out For

⚠️ Credit Risk

While most floating rate funds invest in top-rated securities, always check the portfolio’s average credit quality.

⚠️ Complex Structure

Some funds use swaps or derivatives to simulate floating exposure—make sure your fund house explains it transparently.

⚠️ Taxation

Post-2023 rules:

• Capital gains taxed as per your income slab, regardless of holding period

• No indexation benefit after 3 years

Still, these funds may be more tax-efficient than FDs, especially when used via Systematic Withdrawal Plans (SWPs).

7. When Should You Use Floating Rate Funds?

🟢 RBI has started raising interest rates, and you expect this trend to continue

🟢 You’ve parked funds in traditional debt funds and are seeing NAV dips due to rate hikes

🟢 You want stable returns without locking into fixed income rates

TL;DR — Too Long; Didn’t Read

• Floating Rate Funds invest in bonds where interest resets periodically with the market

• Best suited for rising interest rate environments

• Offer low duration risk, minimal NAV volatility, and upward-adjusting yields

• Suitable for 6–24 month holding periods and cautious investors

• Taxed at slab rates, but still a smart debt strategy in volatile cycles

📩 Wondering how to protect your portfolio from interest rate hikes? Let’s review floating rate funds that can help you earn more without taking unnecessary risk.