Debt funds mostly use two strategies for ensuring higher returns, First is ‘Duration Strategy’, and Second is ‘Accrual Strategy’. Let’s understand:
WHAT ARE ACCRUAL FUNDS?
Accrual Funds are low-risk investments and are invested in short-medium maturity plans. They invest in low-rated securities for generating a high yield and take credit risk. The main aim is to earn interest income in terms of coupon typically offered by bonds. Also, these funds adopt buy, hold strategy, and till maturity hold assets. Apart from this, they also focus on generating better returns as compared to fixed deposits.
WHO SHOULD INVEST?
It all depends on your financial objective and risk profile. For instance, the accrual fund is less volatile as compared to duration-based debt fund. Also, more predictable in returns. Thus, a conservative investor with low–risk appetite can go for this fund.
Apart from offering stability, accrual funds are appropriate for long-term investments.
BENEFITS & FEATURES
- Less Risks in Rate of Interest: Never taking risks when it’s about interest rates rather end up investing in small-midterm tenured bonds.
- No Credit Risk: These funds undertake credit-risk by purchasing companies having a weak credit rating, but with more robust business. The reason for doing this is in the hope of the company performing well and improving the credit-score in the future.
- Steady Income: One of the fundamentals of accrual funds is they put the money in companies for the long-duration. Following this will help investors capitalize on interest income they generate.
- Tax-efficiency: Like (most) debt funds, accrual funds are tax-friendly as compared to fixed deposits. Reason being, they are taxable at the slab of 20%, whilst FD is taxed at 30%, thus, investors falling in the highest tax slab need to pay 20% tax on the returns. The benefits of indexation on the returns is also there.
THE CATEGORIES & THEIR WORKING
Let’s discuss:
- Credit Opportunity Funds: These are debt mutual funds that adopt the accrual strategy for providing better returns; they take credit-risk to generate high-yield. Generally, this type of fund works on the basis of mis-match in the company fundamentals and bond rating. Thus, if there is an improvement in the company’s fundamentals, then the bond will be boosted too.
- Corporate Bond Funds: Contrary to the above funds, corporate bond funds are of low-risk. Also, they don’t involve in taking any extra credit risks, unlike credit opportunity funds.
TOP 5 ACCRUAL FUNDS IN INDIA
Some of the funds, you can explore in this category are:
| S.No. | Fund Name |
| 1 | JM Dynamic Debt Fund |
| 2 | Franklin India Dynamic Accrual Fund |
| 3 | Kotak Dynamic Bond Fund |
| 4 | SBI Dynamic Bond Fund |
| 5 | Mirae Asset Dynamic Bond Fund |
Source: Gulaq Advisory
THE BOTTOMLINE
If you are not a risk-seeker, this fund can serve your purpose. Also, it’s easy to manage and watching the market all the time is not required. However, if you are looking for more exposure, there are hand-picked funds to select from Gulaq. Choose accordingly and happy investing!
*Mutual fund investments are subject to market risks. Please read the scheme information and other related documents carefully before investing.