what does a floating rate fund tell you 
the biggest advantage of a floating rate fund is its lower degree of sensitivity to changes in interest rates compared with a fund or instrument with a fixed payment rate or fixed bond coupon rate floating rate funds appeal to investors when interest rates are rising since the fund will yield a higher level of interest or coupon payments floating rate funds are an attractive investment for the fixed income or conservative portion of any portfolio a floating rate fund can hold various types of floating rate debt including bonds and loans these funds are managed with varying objectives similar to other credit funds strategies can target credit quality and duration the rates payable on a floating rate instrument held within a floating rate fund adjust with a defined interest rate level or a set of parameters as a result floating rate funds are less sensitive to duration risk duration risk is the risk that interest rates will rise while an investor is holding a fixed income investment and thus missing out on higher rates in the market income paid from a floating rate fund s underlying investments is managed by the portfolio managers and paid to shareholders through regular distributions distributions may include income and capital gains distributions are often paid monthly but they can also be paid quarterly semi annually or annually apart from their lower sensitivity to interest rate changes and the ability to reflect current interest rates a floating rate fund enables an investor to diversify fixed income investments since fixed rate instruments often comprise the majority of bond holdings for most investors another benefit is that a floating rate fund enables an investor to acquire a diversified bond or loan portfolio at a relatively low investment threshold rather than to invest in individual instruments at a larger dollar amount in evaluating a floating rate fund investors must ensure that the securities in the fund are adequate for their risk tolerance floating rate funds offer varying levels of risk across the credit quality spectrum with high yield lower credit quality investments carrying considerably higher risks however along with the higher risk comes the potential for higher returns examples of floating rate fund investmentsfloating rate funds can include any type of floating rate instrument the majority of floating rate funds typically invest in floating rate bonds or loans below are two popular floating rate funds the flot seeks results that correspond to both the price and yield performance of the barclays capital us floating rate note 5 years index 1 in other words each note has a maturity of fewer than five years but typically the coupon rates are an aggregate of the one to three month libor rate plus a spread added to it libor represents the interest rate at which banks offer to lend funds to one another in the international interbank market for short term loans libor is an average value of the interest rate which is calculated from estimates submitted by the leading global banks on a daily basisthe flot holds investment grade floating rate notes which include holdings or notes from goldman sachs group inc inter american development bank and morgan stanley the fund has an expense ratio of 0 20 and a 12 month yield of 1 89 with over 5 79 trillion in assets under management as september 2020 1 the ishares short term corporate bond etf invests in corporate bonds that are investment grade and have maturities of one to three years remaining the fund has an expense ratio of 0 06 and a 12 month yield of 2 62 with 20 2 billion in assets under management 2 the difference between money market funds and floating rate fundsa money market fund is a kind of mutual fund which invests only in highly liquid cash and cash equivalent securities that have high credit ratings also called a money market mutual fund these funds invest primarily in debt based securities which have a short term maturity of fewer than 13 months and offer high liquidity with a very low level of risk money market funds typically pay a lower rate compared to floating rate funds however floating rate funds carry a higher risk than their money market counterparts money market funds invest in high quality securities versus floating rate funds which can invest in below investment grade securities such as loans the limitations of using floating rate fundscredit risk of floating rate funds can be a concern for investors who seek yield but are hesitant to take on the added risk to achieve that yield if u s treasury yields are low floating rate funds tend to appear more attractive than treasuries however treasuries offer safety since they re back to the u s government floating rate funds could have holdings that include corporate bonds that are close to junk status or loans that have default risk although floating funds offer yields in a rising rate environment since they fluctuate with rising rates investors must weigh the risks of investing in the funds and research the fund holdings there are other short term bond funds that primarily invest in treasuries but these funds might offer a fixed rate or a lower yield than floating rate funds investors need to weigh the risks and returns of each investment before making a decision 