Mutual Fund unlocked: Accrual Fund

Accrual funds are the debt funds which hold the securities till their maturity. These funds primarily focuses on earning interest income from the coupon offered by the securities in their portfolio. On the other hand, the duration funds focus more on generating returns from the capital appreciation which happens with the interest rate movements.

Accrual funds can also make some returns from the capital gains but these returns count a small portion of their total returns. These funds usually follow a buy and hold strategy that is instruments bought in the portfolio are held till the maturity.

Primarily these funds are divided in two types under open-ended debt fund category that is credit opportunities fund and corporate bond funds. The credit opportunities funds invest into the bonds which are underrated and expected to do well in the future. These funds looks for the mismatches in the fundamentals and current rating of these funds. These funds takes more risks with the investment in the lower rated bonds. The corporate bond funds invest into the highly rated corporate bonds and avoid risks.

As compared to duration funds, these funds are safer in the rising interest rate cycle. So the investors who are not willing to or don’t want volatility in their fixed income portfolio should go for these type of schemes. Being a debt fund, these funds seem to be tax-efficient than that of the traditional saving instruments. The investors with higher tax brackets will benefit from indexation to reduce their tax liability.