Floating Rate Funds: The Flexible Debt Option for Smart Investors
What Are Floating Rate Funds?
Floating rate funds are a type of debt mutual fund that primarily invests in bonds and securities where the interest rate isn’t fixed. Instead, the interest “floats,” or adjusts, in line with an external benchmark such as the Reserve Bank of India’s repo rate or MIBOR. The fund must hold at least 65% of its portfolio in these floating rate instruments to be classified as such.
Why Do Floating Rate Funds Matter?
- Protection from Rising Rates: When market interest rates increase, the interest paid on these bonds also goes up, helping to deliver more consistent returns even when other debt funds might face losses.
- Low-to-Moderate Risk: While floating rate funds still carry credit and market risks, their interest rate risk is usually lower compared to traditional debt funds with a fixed interest income.
How Are Floating Rate Funds Different from Regular Debt Funds?
| Feature | Floating Rate Fund | Regular Debt Fund |
|---|---|---|
| Interest Rate Type | Variable (market-linked) | Fixed throughout tenure |
| Main Advantage | Benefits when rates rise | More stable returns when rates are falling or flat |
| Interest Rate Risk | Lower | Higher (can lead to capital loss if rates rise) |
| Ideal Scenario | Uncertain or rising interest rates | Stable or falling interest rates |
Regular debt funds, such as corporate bond funds or gilt funds, often invest in fixed-rate securities, making them more vulnerable to interest rate changes. In contrast, floating rate funds adjust payouts with the market, cushioning volatility and reducing the risk of price drops when interest rates go up.
Risks of Floating Rate Funds
- Market and Credit Risks: These funds are still exposed to defaults or downgrades of issuers, and broader economic shifts.
- Liquidity Risk: Some securities may not be easy to sell quickly in all market conditions.
- Income Fluctuation: As interest resets with the market, returns can decline if overall rates fall.
- Spread Risk: If the spread over the benchmark widens, the value of floating rate securities could decrease.
Benchmarks Used
Floating rate funds are usually benchmarked against indices like the CRISIL Short Term Bond Fund Index, NIFTY Ultra Short Duration Debt Index, Nifty Short Duration Debt Index A-II, or a similar short-duration debt benchmark. The benchmark helps measure how well the fund performs compared to a broad market basket of similar securities.
Performance of Popular Floating Rate Funds (2022–2025)
The past three years have seen strong performance from leading floating rate funds in India as interest rates trended higher. Here are the returns as of October 2025:[13][3]
| Fund Name | 3-Year Returns (%) | AUM (Cr) | Expense Ratio (%) |
|---|---|---|---|
| Kotak Floating Rate Fund | 7.95 | 2,988.76 | ~0.63 |
| ICICI Prudential Floating Interest Fund | 7.73 | 7,132.62 | ~1.11 |
| HDFC Floating Rate Debt Fund | 7.98 | 1,5445.52 | ~0.49 |
| Axis Floater Fund | 8.37 | 127.76 | ~0.49 |
| Aditya Birla Sun Life Floating Rate Fund | 7.72 | 13,401.98 | ~0.43 |
| Nippon India Floater Fund | 7.96 | 8,259.32 | ~0.65 |
| SBI Floating Rate Debt Fund | 7.87 | 812.49 | ~0.40 |
Source: AMFI as of October 2025. Data reflects regular plans; expense ratios vary by plan.
Who Should Consider Floating Rate Funds?
Floating rate funds may be suitable for:
- Investors seeking stability but who are worried about interest rates rising further.
- Those with a short-to-medium investment horizon who want better yield potential than savings accounts but lower risk than long-duration debt funds.
- Diversifying an overall debt portfolio or parking funds during uncertain interest rate cycles.
Conclusion
Floating rate funds are a valuable option in the Indian mutual fund landscape, especially when interest rates are expected to rise or remain volatile. While they are not risk-free, their structure offers investors a practical balance of safety and opportunity compared to conventional debt funds.
Frequently Asked Questions
What is a floating rate mutual fund?
A floating rate mutual fund invests in bonds where the interest rate changes periodically based on market benchmarks, such as the RBI’s repo rate.
How do floating rate funds differ from regular debt funds?
Floating rate funds invest in bonds with interest rates that adjust according to market movements, while regular debt funds invest in fixed-rate bonds, making them more sensitive to changes in interest rates.
Are floating rate funds risky?
Floating rate funds have lower interest rate risk than regular debt funds, but they still carry credit and liquidity risks depending on the issuers in the portfolio.
Who should invest in floating rate funds?
Investors worried about rising interest rates or seeking a stable addition to their debt portfolio during uncertain rate cycles should consider floating rate funds.
How did top floating rate funds perform in the last three years?
Popular floating rate funds in India have delivered annualized returns between 7.9% and 8.7% over 2022–2025, outperforming several fixed-rate debt categories during rate hikes.
