The Reserve Bank of India (RBI), after cutting the policy interest rate by 125 basis points (bps) in 2025, has so far kept the policy rates unchanged (repo rate at 5.25%) in 2026. The stance of the monetary policy is maintained at neutral.
However, in the last bi-monthly monetary policy review meeting held in June 2026, the central bank observed that the risks to inflation and growth have increased, both globally and domestically.
The RBI revised India's GDP growth projection for 2026-27 downwards to 6.6% (from 6.9% earlier), citing prolonged global supply chain disruptions, heightened volatility in global financial markets, and weather-related shocks.
Considering that headline CPI inflation has been inching up over the last couple of months, the CPI inflation estimate for 2026-27 was also raised to 5.1% from 4.6%, accounting for the upside risks from global supply chain disruptions and uncertainty about the spatial and temporal distribution of the monsoon.
The RBI believed that the outlook remains clouded by the sub-normal south-west monsoon forecast and El Niño risks. In this regard, the food inflation outlook, in particular, remained uncertain.
Plus, the hike in domestic fuel prices is expected to have a direct impact on headline inflation.
The RBI also saw generalisation of inflation through second-round effects on expectations and wages as a distinct possibility.
Although risks of higher inflation have amplified, the six-member monetary committee felt it would be prudent to wait for greater clarity to emerge before it decides on rates. In other words, it preferred to watch the income data, without signalling whether policy interest rates would rise or fall or whether the stance of monetary policy would change.
So, Where Are Policy Rates Headed?
Well, it is unclear. Following the June 2026 meeting, RBI Governor Sanjay Malhotra explicitly stated that any discussion regarding interest rate hikes is premature. Perhaps the RBI wants to avoid a knee-jerk reaction and thus is following a ‘wait and watch' approach. Thus, an immediate rate hike or decrease is unlikely.
Also, because the Indian economy is showing resilience, the RBI would not be under pressure to cut rates.
That said, given the upside risk to the inflation outlook, the probability is skewed towards a future rate hike rather than a cut.
In other words, it seems we are at the bottom of the rate cut cycle. It makes sense to consider floating-rate mutual funds in such a scenario.
Floating-rate mutual funds, or floater funds, are open-ended debt mutual fund schemes that predominantly invest in floating-rate instruments (including fixed-rate instruments converted to floating-rate exposures via swaps/derivatives). These funds are mandated (as per the capital market regulator's guidelines) to invest a minimum of 65% into such instruments.
If inflation rises and the RBI increases the policy repo rate, the bond yields would also move (due to the positive relation between interest rates and yields). In other words, the coupon on floating-rate instruments would be reset upward, thus benefiting the fund from higher accruals, and without you needing to manually lock into new instruments at a higher coupon.
Moreover, because floater funds have a low modified duration, which measures a bond's price sensitivity to interest rate changes, they shield investors better from market-to-market losses. Simply put, your investment is protected from interest rate shocks.
However, when approaching floater funds, ideally, keep an investment horizon of 1 to 3 years, and choose schemes with high-quality debt papers.
Top Floater Funds To Consider In 2026
Among the plethora of schemes available to invest in, the top three floater funds to consider are the following:
- ICICI Prudential Floating Interest Fund
- Kotak Floater Rate Fund
- Aditya Birla Sun Life Floating Rate Fund
What Makes These Funds Worthwhile?
ICICI Prudential Floating Interest Fund
This scheme was launched in November 2005 and currently manages assets worth Rs 7,567 crore – the third largest in the floater funds category. It has historically relied on a very robust credit structure, maintaining a low-to-moderate risk profile and minimal credit-duration hits.
As per its latest portfolio as of 31 May 2026, the fund holds high-credit-quality debt papers with low duration risk. The fund is holding a total of 80 securities in its portfolio with an average maturity of 2.9 years and a yield-to-maturity of 7.9%. Around 81% of the assets are in AAA or equivalent-rated debt papers, 16% in sovereigns and 3% in TREPS and net current assets.
With this qualitative approach and low duration, the fund has clocked 6.9% absolute returns in 1 year and over 3 years, a compounded annualised growth rate (CAGR) of 8.3%, thus outperforming the category average returns (as of 24 June 2026). Moreover, the fund has exposed its investors to low risk (standard deviation of 0.8%) relative to the category and is justified by respectable risk-adjusted returns (Sharpe ratio of 2.43).
Kotak Floater Rate Fund
This scheme was launched in May 2019 and currently has Assets Under Management worth Rs 3,128 crore. It currently has 40 securities in its latest portfolio as of May 2026. These securities are predominantly high-quality, and the fund maintains low-to-medium interest-rate sensitivity overall. It means if market yields spike further due to sticky inflation, the fund will experience minimal negative price impact.
The average maturity is 2.27 years, and the yield-to-maturity of 8.1%. The fund follows a slightly more active approach to boost its yield. 81% of the fund's assets are in AAA-rated and equivalent papers, 14% in AA+ and AA-rated papers, and around 3% in cash & cash equivalents.
With such an approach, the Kotak Floater Rate Fund has delivered 6.2% absolute returns over 1 year and an 8.0% CAGR over 3 years, both higher than the category average.
The fund's risk (standard deviation of 0.9%) is below the category average, and its risk-adjusted returns (Sharpe ratio of 1.75) are higher than the category average.
Aditya Birla Sun Life Floating Rate Fund
This scheme was launched in March 2009 and currently has an AUM of Rs 13,455 crore – the second largest in the category.
It focuses on a mix of short-to medium-term corporate debt instruments alongside synthetic floating-rate conversions to mitigate interest rate volatility.
According to the latest portfolio, the fund holds 206 securities. Nearly 83% are AAA-rated, around 12% are sovereigns, and 5% are in cash & cash equivalents. The average maturity of the portfolio is 1.6 years, an ultra-low duration risk (modified duration of 0.89 years), and the yield-to-maturity is 7.7%.
With this, the fund has clocked an absolute return of 6.2% in 1 year, higher than the category average. But over 3 years, the fund slightly trailed the category average, clocking a 7.6% CAGR. That said, the fund's risk (standard deviation of 0.6%) is lower than the category average, and yet on a risk-adjusted basis, the fund fared well (Sharpe ratio of 2.05)
Conclusion
Floating-rate funds are an effective choice in the current interest-rate environment, but make sure you add schemes thoughtfully, considering your liquidity needs, risk profile, the goals you are addressing, and the time to achieve them.
Also, remember that returns from debt mutual funds are now taxed progressively as per your applicable income tax slab rate, irrespective of the holding period.
Invest sensibly.
Happy investing!
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