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Continued: Fear of rising rates drives investors to floating-rate funds, but they have risks of their own

  • Article by: STAN CHOE , AP Business Writer
  • Last update: June 20, 2013 - 2:40 PM

Interest rates on bank loans rise and fall with a benchmark rate, typically the London interbank offered rate, known as Libor. The one-month Libor rate has been falling over the last year, to 0.19 percent from 0.25 percent.

— THE DELAYED EFFECT

If Libor rates start rising, don't expect an immediate increase to the monthly distributions sent out by bank-loan mutual funds. Libor rates are so low that they're below the minimum interest rates that have been set for many bank loans.

— HIGHER COSTS

With the risk of defaults for bank loans, mutual funds hire teams of professionals to wade through reams of loan documents. That contributes to higher fees. The average bank-loan fund has an expense ratio of 1.19 percent. That means $119 of every $10,000 invested in the fund goes to covering salaries for fund managers and other annual expenses. The average taxable bond mutual fund has an expense ratio of 1 percent, meaning $100 of every $10,000 invested goes toward fees.

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