What is a floating rate fund?
To see what is a floating rate fund, we need to see what is not a floater. We know that mutual funds invest in two kinds of instruments equity and debt. Usually the debt paper that a mutual fund buys, like a corporate bond or a government security, has fixed rates of interest and tenures. For example, the fund could buy a 6 per cent paper for three years. Suppose now the interest rates rise to 8 per cent, this makes the price of the older bond fall (people dont want to buy a bond that promises 6 per cent return, when there is a 8 per cent return possible, hence basic supply and demand gets the bond prices of the cheaper bond to fall. The reverse happens when interest rates fall, bond prices rise). This fall in prices gets reflected in the NAV, which falls. We saw the reverse happen till last year when interest rates were falling, making bond prices rise, giving capital gains to the debt portfolios. In a fixed rate fund, the NAV is still a variable it will move up and down with the mark
