Posts Tagged ‘ Income Funds ’

Accrual v/s Duration Strategy – Where to Invest ??

Thursday, September 5th, 2013

Debt Fund Investors are usually confused as whether to go for Duration-based funds or funds with Accrual Strategy. Let’s understand the basic rationale of the strategies.

Duration Based Strategy:

The funds which follow the Duration based strategy invest in long term bonds and benefit from the fall in interest rates. They earn from capital appreciation along with the coupon of the bond. These funds are exposed to interest rate risk and if the interest rates move up these funds bear capital losses.

All long term Income and Gilt Funds follow the duration based strategy.

These funds are advisable for investors who can ride with the volatility associated with the fund.  The Funds can generate better return in a time when the interest rates are set to move downwards.

Accrual Based Strategy:

The funds which follow accrual strategy generally buy short term instruments and prefer to hold till maturity, this reduces the interest rate risk. Corporate bond funds invest in high yielding corporate bonds which have a shorter maturity period.

FMPs, Ultra Short term bond funds and Short term bond funds follow this strategy.

If an investor needs a steady return from his Debt portfolio and is not ready to take higher risk he should invest in Accrual based funds.

An Investor can also adopt a combination of both the type of funds in his debt portfolio as per his risk profile.

How to decide

Both the strategies have their own merits and have different risk reward proposition for the investor.

Let’s compare the performance of Income Funds of both the categories:

Duration vs accrual

 

Looking to the returns of last one year we find that both the categories have earned similar returns, but as we move to the most volatile period i.e from 15th July 2013 till date we find the Accrual funds have flared well compared to the duration ones.

The Accrual funds benefited because of  two reasons, first they  generally carry a shorter maturity of around 1.5 to 3 years and interest rates in India at the shorter end are quite attractive compared to longer end secondly these funds have not faced redemption pressures as the investors were restrained by heavy exit load in some of the funds.

The current scenario depicts a risk reward in favour of the shorter end of the curve. The RBI shocker has disproportionately impacted the short term curve and we feel the investor should choose a mix of funds few with extreme shorter maturities and few with longer maturities. The strategy will effectively give a balanced duration to the portfolio and capture the opportunities given the inverse yield curve.

 

Opportunity in the Troubled Times

Monday, August 26th, 2013

Time to Invest in Debt Funds.

Recently the RBI imposed Liquidity tightening measures to curb Rupee Volatility. The liquidity tightening has resulted into higher bond yields. The shorter term as well as longer term interest rates have spiked up. This provides us an entry point to Invest in Debt Funds.

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