Accrual strategy
When adopting an accrual strategy, the fund manager typically looks for corporate bonds that provide good yields. His focus is on getting returns through high accrual of interest on the bonds that he holds. He is not targeting to make capital gains from rise in bond prices. He would rather focus on extensive credit analysis to identify corporate bonds that offer attractive yields, and which in his view offer adequate comfort of timely payment of interest and repayment of principal.
Generally, in a rising interest rate environment, the fund manager would not want to be locked into high duration bonds which can see sharp erosion in prices as interest rates rises. Rather, he would like to keep the duration at the minimum, since he is likely to get higher yields on maturity of existing bonds, so long as they are maturing in the near term. If duration has to be minimised to avoid interest rate risk, the focus will shift to searching for short duration corporate bonds that can fetch a higher yield than government bonds of similar maturities. In other words, the search for returns is dictated by a trade-off between yield that he can get on corporate bonds and the credit risk he is taking by buying these higher interest bearing (and possibly lower credit rated) corporate bonds.
You will often find accrual based funds that allow the fund manager to run a portfolio with an average maturity of anything between say 1 and 3 years.
Short Term Funds, FMP’s are classical examples of funds in which fund managers try and deploy Accrual Strategy.
Duration strategy
A fund manager who employs a duration strategy is one who takes a call on the direction of interest rate movements and accordingly focusses on adjusting the duration of his portfolio to maximise returns. He is less focussed on searching for corporate credits with high accruals - he would rather cut out the entire credit risk aspect, stick to government bonds, but focus on managing duration to drive returns.
In periods of declining interest rates, he would opt for a relatively high duration, in an effort to maximise capital gains from rising bond prices. Conversely, in periods of rising interest rates, he would minimise the duration of the fund to protect against capital losses on the portfolio. This not only protects against capital losses, but at the same time, allows him to reinvest maturity proceeds at higher yields in a rising rate environment. In other words, the higher accruals are aimed at offsetting capital losses, to enable the fund to deliver a reasonable return.
Income Funds, Gilts & Dynamic Bond Funds are classical examples of funds in which fund managers try and deploy Duration Strategy.