Accrual Strategy (Debt)

Two ways to make money in debt

Every debt fund manager in India faces a basic choice. They can chase capital gains by betting on falling interest rates — a duration strategy, where bond prices rise when the RBI cuts rates. Or they can quietly collect the coupon that bonds pay, holding them until maturity and pocketing the interest. That second approach is the accrual strategy.

An accrual fund is essentially a buy-and-hold income machine. It loads up on short-to-medium maturity corporate paper, earns the interest as it accrues, and largely ignores the daily price swings driven by rate expectations. Most corporate bond funds, credit risk funds and many short-duration schemes run on this logic.

Why investors like it

The appeal is predictability. Because returns come mainly from coupons rather than price bets, accrual funds tend to be less volatile than duration funds and less rattled by a single RBI policy meeting. For an investor who wants something steadier than equities but with potentially higher yields than a fixed deposit, that smoother ride is the draw.

The trade-off is credit risk. To earn a richer coupon, some accrual funds — especially credit risk funds — hold lower-rated bonds. If an issuer defaults or is downgraded, the NAV can drop sharply. Liquidity risk also lurks if those bonds are hard to sell. So the higher the promised accrual, the closer you should read the portfolio's credit quality.

How India taxes it

This is where the rules turned harsh. After the 2023 amendment, debt mutual funds (those with less than 35% in Indian equities) lost their indexation benefit. Gains are now added to your income and taxed at your slab rate, regardless of how long you hold — erasing the old long-term capital-gains advantage.

That change makes the *underlying yield* matter more than ever. An accrual fund suits investors who understand they are essentially buying a diversified, professionally managed basket of corporate bonds — taxed, now, much like the interest a bond itself would pay.