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What is a Floating Rate Fund?

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    Floating rate funds have gained popularity over the years as opportunities for investors to increase their level of current income. They tend to provide a flexible interest in a rising rate environment, which can be a great way to boost investors’ portfolios and grow their wealth — especially if they have disposable income.

    Many investors have numerous questions about floating rate funds, however, including how can they get started on such a financial venture. This guide will explain everything you need to know about floating rate funds: what they are, their long-term and short-term benefits and risks, whether they come with a guarantee of future results, and how they can provide the profits you want.

    Floating Rate versus Fixed Income Fund

    Floating rate funds are funds that invest in financial instruments paying variable rate, typically in debt and bond instruments whose interest payments fluctuate with an underlying interest rate level. Here are some quick facts to keep in mind:

    • Fixed-rate investments have a predictable and stable income, by comparison.
    • Floating rate funds fluctuate with rising rates, but fixed-rate funds lag in the market since their returns remain fixed — meaning the former attract yield-hungry investors.
    • These floating rate funds include corporate bonds as well as individual loans made by banks to businesses, and can be repackaged and included in a fund for investors.


    That flexibility creates several positives for such investments.

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    6 Benefits and Drawbacks to Floating Rate Loans 

    Floating rate funds are often considered superior to other bonds types because of the perks they offer investors who are willing to take a risk to amplify their total returns. In general, these funds can benefit an investor in the following ways: 

    1. They are less sensitive in the short term.

    One of the greatest benefits of a floating rate fund is that its net asset value is less sensitive to changes in short-term borrowing rates than other income-producing mutual funds, such as long-term bond funds. This makes such funds extremely attractive to investors when the economy is recovering, as short-term interest rates are most likely to rise. 

    2. Diversification is key to floating rate loan investing.

    What makes floating rate funds so exciting for investors is that they can offer diversification benefits. This is because these rate funds are uniquely structured, have low correlations with most major asset classes, and the floating rate fund market is relatively untapped. This means that these niche markets can provide investors with numerous opportunities for investment, because the less efficient a market is, the greater the opportunity an investor has. In addition, this diversification within the fund’s portfolio can also reduce the impact of any single default. 

    3. Floating rate loans offer more significant yield.

    Floating rate funds are often known for their higher yields, which can exceed those of safe investments by as much as 2%. This can be a critical difference for investors who rely on their portfolio income to pay their bills and living expenses. If you feel you may need to rely on floating rate fund income for your livelihood, you may want to focus your efforts on more fixed-income fund investments.

    Floating rate funds can provide investors with significant profits and numerous gains, but investors still need to realize that there are certain drawbacks and risks to them.

    4. The expenses of floating rate bank loans can be great.

    Unfortunately, many floating rate funds have a high annual expense ratio in comparison to bond funds. That expense ratio can ultimately reduce an investor’s payout and total returns on their contributed funds. In addition, there may be a sales charge that is assessed for any redemption made within a certain period of time after purchase. This period can be anywhere from one to three years, making the expense ratio crucial to determining if fixed-income or floating rate loans is better for your portfolio.

    5. There can be negative impacts of investing in floating rate loans.

    It is important to realize that many floating rate funds use leverage in their portfolios. This means that they borrow money to purchase additional loans to achieve a higher return. Going for higher returns does not mean that it always works out this way, however. In truth, leverage can also amplify losses. If a fund borrows money and purchases a loan that defaults, for example, this investment can have a significant negative impact —not only from the loss, but also because you are required to pay off the interest on the margin loan that was used to buy the defaulted loan. 

    6. It can be difficult to redeem floating rate fund shares.

    If you invest in a floating rate fund, you need to understand that these funds may only allow investors to recover their shares at set periods, such as once per month. In fact, many only allow redemption once per quarter or make it impossible to take money out at all in the first year. If you are counting on your investments to maintain your current financial status, this may make a difference in where you allocate your funds. You want to maximize your total returns, after all.

    Understanding some of the basics can help you determine if a floating rate bank loan is right for your long-term or short-term investment portfolio. You need to keep the expense ratio in play, the fluctuating interest rates and how they impact your finances, and the damages or losses arising from your investment strategies in mind as you make these choices.

    Is a Floating Rate Fund the Right Move? 

    As an investor, you may understand the benefits and disadvantages of a floating rate fund or see the term “floating rate” and find it incredibly alluring. Weighing the pros and cons of any investment decision can be a difficult process, however. If you find yourself going back and forth about whether this floating rate fund is the right choice for you, consider asking yourself the following questions:

    • Are interest rates low?
    • Have interest rates fallen quickly in a short period of time?
    • Are interest rates expected to rise?
    • Are you dissatisfied with low short-term rates?
    • Is your primary concern to maintain a portfolio that keeps up with the rate of inflation? 
    • Do you have a high level of current disposable income?


    If you answered yes to any of these questions, you may want to talk to an experienced wealth manager about floating rate funds and whether they are good investments for you. 

    Let’s Make Floating Rate Bank Loans Work For You

    Before you decide on investing in a floating rate fund, you need to make sure it is the right move for you and your money. Speaking to a wealth management partner can assist you in making this critical decision, including helping you examine current interest rates, interest rate risk, performance and other loan index attributes, and more.If you’ve got questions about your investment portfolio, you need an experienced wealth manager to help guide you through your options, compare mutual funds, take a look at an expense ratio, and more to make sure your strategy is going to give you the best possible total returns. Contact Bogart Wealth today and speak with one of our experts about any floating rate fund questions you might have. We can’t wait to get started.

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