Floating Fund is a mutual fund where the funds are invested in bonds and debt funds with varying interest rates. This is also called as prime rate funds, loan participation fund or bank loan fund. This is new financial instrument developed recently when compared to other types of funds.
In these funds there will be a base interest rate which is always fixed. It is added along with a variable rate that is decided by the financial institution according to the fluctuations in the interest rates. The base rate is also called as benchmark rate.
Advantages of floating fund
- Risk is moderate- When compared to other types of mutual funds, floating funds is of low risk because here investment is made on a more stable product
- Stability- Here the share prices of fund will remain more stable, because the investment targets bonds and securities that respond less to market fluctuations.
- Low sensitivity
- Higher yield
Disadvantage
- Liquidity (ability to market asset without drastic change in price) is limited because the redemption of shares happen only during a fixed periods in an annual year.
- Chance of leverage
Who all can prefer this fund?
Usually long term investors are best suited for this fund. Mainly you have to keep in mind that this fund is having low liquidity so short term investors are not favored. More over those investors who can tolerate risk in return of money are being welcomed to floating fund investments.
