The Nuances Of Floating Rate Debt Funds

The word going around is that the Reserve Bank of India (RBI) is set to normalize (read increase) interest rates. Yes, we are at the cusp of reversal of the interest rate cycle. The common question now is: how to insulate the debt component of the bond portfolio from interest rate hikes (as rates and bond prices move inversely)? Or better still, how to benefit the debt component of the portfolio from rate hikes? The closest solution is to invest in floating rate funds of funds, where the coupon (interest received on defined dates) is expected to move up along with rising interest rates. Due to this expectation, the floating rate fund category is receiving buoyant inflows from investors. While you can take advantage of floating rate funds, it is important to first understand how these funds work. In other words, understand how your interest “floats” with changing...