Investment experts are divided about the fixed income strategy. Some argue that duration-based investing (that is, investing in long-term income funds and gilt funds) will work better in the coming days as these funds, which buy long-term bonds, will benefit from a fall in interest rates and will earn capital appreciation along with the coupon payable. The other group dismisses the theory by highlighting the interest rate risk associated with these funds - if interest rates move up, these funds may see capital losses. They recommend the accrual-based strategy of investing in fixed maturity plans, ultra short-term bond funds and short-term bond funds. These schemes generally buy short-term instruments and prefer to hold them till maturity, which eliminates the interest rate risk. As you can see both these strategies- accrual and duration - have merits, and it would be wise to consider the risk and reward they bring to the table. And also, you have to clearly define your goals and investing personality. "Short-term interest rates — one-year to three-year — are attractive now. You should invest at least half of your portfolio in fixed maturity plans and short-term bond funds. If you can digest volatility, you can invest the rest of your money in duration-based products such as long-term income and gilt funds — since they are expected to do well as rates go down," says Vinod Jain, principal advisor at Jain Investment Planner.
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