Accrual strategy in debt mutual funds is holding a bond till maturity and accruing the interest paid by the bond. A regular bond pays coupon or interest at fixed intervals and pays back the face or par value at maturity. An investor can buy a bond at a premium or discount to face value, but once purchased and if held till maturity, the investor will get coupons attached with the bond and face value on maturity. The price of a bond has an inverse relationship with interest rate changes – it goes up, when interest goes down and vice versa. But changes in prices of bonds with interest rate will not affect the cash-flows received by the investor if it is held to maturity. In accrual strategy the fund manager avoids taking interest rate risk by investing in short or medium duration bonds with a view to hold the bonds till maturity. However, in accrual strategies, even though the fund manager does not take interest rate risk, the scheme is exposed to credit risk. So debt mutual funds which employ accrual strategy spend more effort in credit assessment of bonds or debentures to minimize or optimize credit risk.
