Get the Tata Capital App to apply for Loans & manage your account. Download Now

Blogs

SUPPORT

Menu  
 
Apply Now
Apply Now

Tata Capital > Blog > Wealth Services > Accrual funds vs duration funds: Choosing the right debt fund strategy

Wealth Services

Accrual funds vs duration funds: Choosing the right debt fund strategy

Accrual funds vs duration funds: Choosing the right debt fund strategy

Debt fund strategies: Accrual vs duration explained

There is so much written about equity funds that debt funds seldom get enough limelight. This time, we bring to you the nuances of debt fund investing. Most debt fund managers use 2 strategies to generate gains from their investment, namely, the duration and accrual strategy. Here, we understand how these strategies differ and the means to make the best out of these strategies. However, before we embark on understanding the strategies, it is customary that we understand what debt funds are!

What are debt funds?

Debt mutual funds, often referred to as debt funds, invest in fixed-income instruments. These could range from Treasury bills, Government Bonds, Corporate Bonds, and money market instruments, etc. The investment will yield interest or fixed income and/or capital appreciation. Debt funds are also referred to as fixed-income funds. Their cash flow is less volatile, and often, you have an idea regarding the possible returns that can be generated from the investment.

The advantages of investing in debt mutual funds over other debt instruments are manifold:

  • High liquidity, in contrast to other debt instruments, where the tenure is fixed
  • Higher tax efficiency in comparison to other debt instruments
  • Access to debt instruments, such as money market instruments, which are not accessible to retail investors otherwise due to the high minimum investment amount
  • Ability to invest in a systematic format each month to channelize your savings

It is a good option for someone who intends to gain a regular income and is also risk-averse. Even the most elite investors have a part of their funds in debt to ensure that it can be pulled out in case of an emergency. For unforeseen circumstances, having funds in debt can help you leave the rest of your investments unperturbed. However, veterans know how to play the debt market well to generate substantial gains.

Accrual funds: Meaning and how they work

This strategy differs drastically from that of the duration strategy. The focus here is to earn interest income based on the coupon offered by the underlying instruments from the debt fund held. There is an emphasis on taking advantage of the mismatch in credit quality. Typically, a company with a lower credit quality will offer a higher coupon, as it does not have the borrowing credibility at competitive rates like the ones that have superior credit quality.

Under this strategy, the fund manager will invest in debt funds with instruments that have lower credit ratings. These instruments offer better coupons than the ones with higher credit ratings. On the other hand, the fund manager speculates that the company’s prospects may improve in the future, which would lead to a revision of the credit rating, potentially increasing the bond prices. Thus, the fund manager can achieve the dual benefit of generating higher coupon yields and possible capital appreciation in the future. It is also pertinent to note that duration strategy is not just about investing in credit risk funds; it is also about altering the duration of holding of a range of funds, including corporate bond funds, banking and PSU debt funds, etc.

Duration funds: Meaning and how they work

Often, investors in debt with a duration strategy have an eye on the interest rate movement. This is a strategy where the fund manager will have an interest rate outlook. The duration of the holding is actively managed under this strategy. Let’s understand this with a scenario:

If the fund manager foresees that interest rates are likely to fall, he will maintain a long position in the intended debt fund (here, this is achieved by investing in a Long-duration funds / Medium to Long duration funds / Gilt Funds / Dynamic Bond Fund, where the underlying instruments are of a long-term nature, 5 – 10-year bonds, etc.). When the interest rates are likely to fall, the investment strategy is to hold a long position by investing in a long-term paper. This is relative to the benchmark, as the focus of any investor/fund manager would be to outperform the benchmark. When the interest rates fall, the long positions held will generate capital appreciation, as the bond prices of long-term bonds tend to go up when the interest rates fall.

On the contrary, if the interest rates are likely to go up, then a short duration has to be maintained concerning the benchmark. The fund manager’s position is always in relation to the benchmark, as the focus is to generate alpha (excess returns as compared to the benchmark).

You must note that the long and short are used in debt funds in the context of the duration of underlying instruments, and not from the perspective of buying and selling positions, as in the case of equity funds.

Accrual funds vs duration funds: Key differences

Accrual funds and duration funds are types of debt mutual funds. They invest in bonds and fixed-income securities, but follow different strategies to earn returns. The following table highlights the key differences between accrual funds and duration funds to help you make an informed choice.

FeatureAccrual fundsDuration funds
StrategyEarn from interest incomeEarn from interest-rate movements
Interest-rate impactLess sensitiveHighly sensitive
Risk levelModerateCan be higher
Return sourceCoupon incomePrice changes in bonds
Ideal whenRates are stableRates may fall
Investment horizonShort to medium termMedium to long term
VolatilityLowerHigher
Suitable forConservative investorsInvestors who are comfortable with rate risk

When to choose accrual or duration funds?

The decision to choose between accrual and duration funds depends on interest-rate trends, risk level, and your time horizon. You should choose accrual funds if you see stable interest rates. They should also be the choice if interest rates are slowly rising. Accrual funds focus on earning regular interest from bonds, so returns are usually steady with lower volatility. These funds suit conservative investors and those with short- to medium-term goals.

Duration funds are useful when you expect interest rates to fall. Bond prices usually rise when rates fall, so these funds can give higher returns in such periods. However, they are more sensitive to rate changes and can be volatile. They suit investors who can handle risk and have a medium- to long-term horizon. Always match the fund choice with your financial goals and risk tolerance.

Risks and returns: What investors should know

Before investing in accrual or duration funds, you must consider the following pointers regarding the risks and returns:

  1. Risk and return go together: Higher returns usually come with higher risk.
  2. Market changes matter: Interest rates, inflation, and economic news can affect returns.
  3. Short-term ups and downs: Some funds may fluctuate daily, so don’t panic over small changes.
  4. Credit risk: If a bond issuer fails to pay, returns can decline.
  5. Interest-rate risk: When rates rise, bond prices can drop, affecting fund value.
  6. Investment horizon: You can manage temporary losses with longer holding periods.
  7. Diversification helps: Investing in different assets can reduce overall risk.
  8. Check fund quality: Look at portfolio quality and past consistency.
  9. Know your comfort level: Choose funds that match your risk tolerance and goals.

Who should invest in accrual funds?

Accrual funds are suitable for investors seeking steady and predictable returns from debt investments. They are ideal for conservative investors who prefer lower volatility and do not want large ups and downs in value. People with short to medium-term goals, such as saving for travel, fees, or an emergency fund, can consider them.

These funds also suit investors who want regular income from interest and expect interest rates to stay stable. Beginners in debt mutual funds may find accrual funds easier to understand. They are also useful for diversifying a portfolio and balancing risk from equity investments.

Who should invest in duration funds?

Duration funds are suitable for investors who can handle some ups and downs in returns. They are a good choice for people who expect interest rates to fall, as bond prices may rise in such periods. Investors with a medium-to-long-term horizon, usually three years or more, can consider these funds.

They suit those who want the chance of higher returns than simple debt funds and understand interest-rate risk. Experienced investors or those who follow market trends may benefit more. Duration funds also help diversify portfolios for equity investors who are comfortable with moderate volatility and temporary price changes.

How to assess credit quality in accrual funds?

Accrual funds earn mainly from interest on bonds, so credit quality is very important. Good credit quality means the issuer is likely to repay on time. Investors should check a few simple things before investing.

First, look at the credit ratings of bonds in the portfolio. Funds with more AAA ratings or high-rated bonds are usually safer. Second, read the fund factsheet to see where the money is invested. Avoid funds with too much exposure to low-rated or unrated papers. Third, check the fund manager’s track record in handling credit risk. Fourth, see if the fund is well diversified across many issuers. Finally, watch for sudden drops in returns or news about defaults. Choosing funds with strong credit quality can help reduce risk and keep returns more stable over time.

Accrual mutual funds meaning in simple terms

Accrual mutual funds are debt funds that mainly earn from the interest paid by bonds and other fixed-income securities. The fund manager buys bonds and holds them to collect regular interest instead of trying to profit from price changes. Because of this, returns are usually more stable and less affected by daily interest-rate movements. These funds are suitable for investors who want steady income, lower volatility, and a short- to medium-term investment option with moderate risk.

Taxation of accrual and duration debt funds in India

In India, accrual and duration funds are both treated as debt mutual funds for tax purposes. If you sell units within 3 years, gains are added to your income and taxed as per your income tax slab. If you hold them for more than 3 years, they are still taxed at slab rates under current rules, as indexation benefits are no longer available for most debt funds. Dividends, if any, are also taxed at your slab rate. Investors should consider their tax bracket before investing. Choosing the right holding period and fund type can help manage overall tax impact and improve post-tax returns.

In conclusion

Both these strategies may be used in appropriate proportions by the fund manager to generate optimal returns. It is important to note that there are severe pitfalls under both strategies, especially so if the economic scene does not pan out as intended.

It takes a trained hand to tactfully execute debt fund strategies. You can reach out to experts at Tata Capital who can help you include the appropriate debt funds in your portfolio, which will generate optimal returns and align with your risk profile.

Read More Blogs

Build Your Wealth with Expert Guidance from Tata Capital!

Apply now
Popular Searches
aif full form pms vs mutual fund bnpl meaning debt investment options debt syndication unlisted equity shares meaning gold etf vs gold bond plot plus construction loan

FAQs

What is the meaning of accrual funds?

Accrual funds are debt mutual funds that mainly earn returns from interest on bonds and fixed-income securities, aiming for steady income with relatively lower volatility than interest-rate-driven funds.

How do accrual mutual funds work in India?

In India, accrual funds invest in bonds and hold them to collect regular interest. Returns come mostly from coupon income rather than bond price changes due to interest-rate movements.

What are the key differences between accrual and duration funds?

Accrual funds earn mainly from bond interest and are less sensitive to rate changes. Duration funds try to benefit from interest-rate movements and can be more volatile.

Who should invest in accrual funds?

Conservative investors, short to medium-term planners, and those seeking stable, predictable returns with lower volatility and moderate risk may consider investing in accrual funds for balance.

Are accrual funds safe compared to duration funds?

Accrual funds are usually less volatile than duration funds, but not risk-free. Credit risk and interest-rate changes still affect returns, so safety depends on bond quality and fund management.

Disclaimer

Most Viewed Blogs

Trending Blogs

Calculator

Personal Loan EMI Calculator

Personal Loan EMI Calculator
Home Loan EMI Calculator

Home Loan EMI Calculator
Business Loan EMI Calculator

Business Loan EMI Calculator
Used Car Loan EMI Calculator

Used Car Loan EMI Calculator
Two Wheeler Loan EMI Calculator

Two Wheeler Loan EMI Calculator
Loan Against Securities Calculator

Loan Against Securities Calculator
Loan Against Property Calculator

Loan Against Property Calculator
More Tools
Our Subsidiaries
Our Private Equity Funds

Useful Links and Resources

Policies, Codes & Other Documents

Tata Capital Solutions & Services

Copyright © 2026 Tata Capital Limited

error-icon

Uh oh, something went wrong

Please try again later.

Most Important Terms & Conditions - Home Loans

Download in your preferred language

Download