Floating Rate Funds (FRFs) are a type of fund that invests in financial instruments with a variable or “floating” interest rate. In other words, the interest rate associated with the investment will fluctuate based on the prevailing underlying rate. In times of higher interest rates, the income earned from FRFs is relatively higher in comparison to fixed rate investments.

FRFs mainly invest in bonds and debt instruments such as corporate bonds and loans made by banks to companies. The loans can be repackaged and included in the fund when investors pool their money, thus minimizing the risk associated with these loans. Common examples of FRFs include money market funds, commercial paper securities, and floating rate notes.

FRFs are attractive since they offer yields in a rising rate environment, since the interest rates paid to investors tend to increase as the underlying rate rises. Moreover, the main advantage of FRFs is that they may avoid the shortterm losses that fixed rate investments incur during a period of rising interest rates.

However, at the same time, investors should weigh the associated risks when considering a FRF. For instance, the banks associated with the loans pools may not always practice prudent lending and could default on their obligations. Thus, for investors wishing to invest in FRFs, it is important to do proper research into the fund holdings, the instruments that the fund is invested in, the lending practices of the associated banks and the track record of the fund manager.

In conclusion, a Floating Rate Fund is a type of investment fund that invests in financial instruments with interest rates that move in line with the prevailing underlying rate. While they can offer good yields in a rising rate environment, they also come along with some risk that must be taken into consideration.