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Floating Rate Funds

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Floating rate funds invest in instruments whose interest rate changes as per the market condition. Simply put, in a floating rate instrument, the coupon rate is not fixed. Instead, it is benchmarked against a market driven rate like Mumbai Interbank Offered Rate (MIBOR). As the coupon rate is adjusted to the benchmark rate, the NAVs of these funds do not react much to the changes in the interest rate environment. Floating rate funds can also be good options in a scenario where the interest rates are expected to rise. Besides, they are more tax efficient than liquid funds.
Floating rate funds are ideal for investors looking to park short term funds and that too without any risk of losing capital due to interest rate volatility.
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