After the Wednesday's policy review meet of RBI that makes it clear that RBI may not be in a hurry to cut interest rate, analyst are advising investors in fixed income instruments to switch to accrual funds. Know details about this fund option here.
Accrual bonds have their prime focus on earning interest from the coupon interest offered on bonds. Capital gains also provide for some return in case of accrual debt funds but the proportion of this is very small in comparison to overall return. On the contrary , the other category of debt funds, duration funds tend to provide returns from the capital appreciation that results from the declining interest rate scenario.
Further as the trading volume in case of accrual debt funds is very low. It comes with a buy and hold mandate. Nonethelesss, the scenario is not the same for duration funds as these are traded based on the interest rate view of the team managing the fund.
Type of Accrual Funds
1. Credit Opportunity Fund
2. Corporate Bond Fund
Credit Opportunities Fund or CROP funds focus on mismatch in the bond grading and its fundamentals. So, upon research of the fund manager, there may be chances that the bond may be upgraded and hence gain in capital terms. While the other category is a safe one in comparison to CROP funds as they invest in high-graded papers and do not take any additional credit risk.
In the current scenario also, when no significant rate cuts are on the anvil, experts suggest these fund categories to tap on interest income. So, seeing the regime, it is well in the interest of investors not to take big bets on interest rate volatility and spread their portfolio across different debt instruments.