Are accrual strategies the new key to success in fixed income investing?

Mumbai: Investors may have to change tack in fixed income investing. With the Reserve Bank of India holding interest rates steady and having already frontloaded 100 basis points of cuts, money managers and investment advisors said the focus should now shift from duration plays such as long-term and gilt funds to accrual strategies-debt schemes that earn through steady interest income.

"Investors have benefited from capital appreciation as yields have fallen and spreads on 10-year and 30-year bonds compressed sharply," says Devang Shah, head, fixed income at Axis Mutual Fund. Shah said while interest rates are likely to remain lower for an extended period, the structural rally in long bonds appears to have played out.

Investors holding long-term and gilt funds could book profits after earning high single-digit returns over the last year.

The probability of further rate cuts looks low. Investors could move to accrual strategies and deploy money in short to medium tenure funds," says Nirav Karkera, head of research, Fisdom.

Agencies

As per data from Value Research, gilt funds with a 10-year constant duration have returned an average of 8.94% over the last one year.

The fund categories that follow accrual strategies include corporate bond, short duration, medium duration and credit risk funds.

"Bond investors should focus more on the accrual strategies going forward rather than waiting for the potential price appreciation from the fall in bond yields," says Dhawal Dalal, chief investment officer, fixed income, Edelweiss Mutual Fund. Dalal said investors should focus on a portfolio of corporate bonds maturing in 2 to 5 years, to benefit from the accrual and lower price volatility.

Wealth managers believe investors with a timeframe of three to six months can consider ultra short-term funds that can return 6-6.5%, while those with a time frame of up to two years can consider corporate bond funds that can return around 6.5-7%.