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Floating-rate Funds

Mr. Mogul asks if floating-rate funds are an advisable option in the prevailing market situation

I am a senior citizen, I wish to know that how safe are floating rate funds in a volatile market. In the prevailing market situation, an investor like me does not mind a lower rate of return but cannot take the risk of capital erosion. Are Floating-rate funds a good option to consider in a sliding market?
-T.R. Mogul

All debt funds carry interest-rate risk. Floating-rate funds are also debt funds though they are less affected by the interest-rate fluctuations than the fixed-rate funds. This is because of the underlying investment of these funds. Floating-rate funds invest predominantly (65-100 per cent) in floating-rate instruments. The interest-rate on these instruments is readjusted periodically according to the existing market interest-rate hence reducing the interest-risk considerably. Thus in the prevailing market situation, floating-rate funds are a better option, considering the unpredictable interest-rate movements.



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