Plan With Fixed-Income Funds For Retirement

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Plan With Fixed-Income Funds For Retirement
Plan With Fixed-Income Funds For Retirement
Joydeep Sen - 30 June 2024

Fixed-income funds lend stability to your portfolio, have better cash flow visibility, and help preserve capital. They can be used in various stages of planning

Financial planning for retirement can be broadly divided into two phases: the accumulation phase when you are earning, saving and investing, and the decumulation phase, when you are drawing from your investment kitty. There are also sub-parts to this: during the accumulation phase, there are multiple financial goals on which you spend money, and for which you need to plan. But between these two phases, there is also the consolidation phase. Here, say from age 55 to 60, you gradually move from riskier assets, which are more volatile, to the defensive assets to de-risk your portfolio in your golden years after retirement.

Let’s see how fixed-income funds can help you in the financial planning process in this stage.

What They Offer

Stability: Returns from fixed-income funds are relatively more stable than equity funds. The reason is that fixed-income instruments, such as bonds or bank deposits have a known rate of interest, which is taken into account in the daily net asset value (NAV) computation. This is, however, not the case with equity funds, where dividend is taken in the NAV only when it is paid. Price volatility in the equity market is also relatively higher, which makes the NAVs of equity funds fluctuate more. Hence, you should invest a part of your portfolio in fixed-income funds for stability.

Visibility: Fixed income assets give better clarity on the amount and timing of cash inflows. For instance, bonds have a defined maturity date and amount, while in case of mutual funds, target maturity funds (TMFs) have a defined maturity date and an estimate of the returns, which is somewhere around the initial portfolio yield-to-maturity (YTM). YTM data for funds are available in the monthly factsheet.

For the usual open-ended fixed-income funds, provided you hold them for an adequate period of time, you will get decent returns with reasonable visibility. You can also take the portfolio maturity of the fund as the adequate holding period. This is available in the funds’ monthly factsheet.

Your expectation on returns would be somewhere around the portfolio YTM over a reasonable horizon. Just to clarify, the portfolio YTM is not a commitment on returns from the mutual fund, but only a ballpark indicator.

Parking: There are certain short-horizon investments in your portfolio. There is an emergency cash component of say 5-10 per cent of your portfolio. You should keep this in fixed-income funds, and within that, in conservative avenues like liquid funds. You may have short-horizon financial goals, say for six months or a year. These short-horizon sums have to be parked in appropriate fixed-income funds.

Capital Preservation: Investment avenues that are more volatile, such as equity, may lead to a temporary loss, on paper. When prices in the market come down to a level lower than your purchase price, it is regarded as a “paper loss”—it will become a real loss if you sell it at that price. This is temporary because it is expected that prices will recover going forward. However, at times, preservation of capital is a primary objective, and for retired people, senior citizens, even a paper loss may be difficult to digest. Fixed- income funds, on the other hand, provide preservation of capital.

Within fixed-income also, there are multiple fund categories. The more defensive ones with shorter portfolio maturity, such as money-market funds provide better preservation. The long-duration bond funds may go through a temporary paper loss for some time, but are more certain to recover than equity funds.

Planning Phase

Accumulation: In the accumulation phase of your career, since you are younger, have a higher risk appetite, and time on your side, you can have a higher allocation to riskier assets, such as equity. History shows that over a long horizon, say 10-15 years, equity always gives positive returns.

Do note that your allocation is a function of your horizon and risk appetite. The thumb rule to equity allocation is 100 minus your age. For instance, if you are 40 years old, then the allocation to equity should be 60 per cent. Herein comes the role of fixed-income: if you want 40 per cent of your portfolio to be in a relatively stable component, your portfolio should be 60:40 in equity and debt. If you want a more diversified portfolio, then a little less than 60 per cent would be in equity, little less than 40 per cent would be in fixed-income, and the balance in gold or any other asset you prefer.

Fixed-income builds your wealth over a long period, though at a slower pace than equity. The rationale for having a diversified portfolio and not a 100-per cent-equity one, is that a properly allocated portfolio balances out the fluctuations of one asset with another, making your wealth accumulation journey smooth.

Consolidation: When you are nearing retirement, you have to gradually de-risk your portfolio. You have to move away from riskier assets, such as equity to stable assets like fixed-income. There is no definition as such for the consolidation phase; it may be taken as age 55-60, assuming you would retire at age 60. Assuming that in your accumulation phase you were running an allocation of 55 per cent in equity, 35 per cent in fixed-income and 10 per cent in gold, in the consolidation phase, you have to change it gradually.

At age 60, since you do not have any active income and will draw from your investment kitty, this would become, say 40 per cent (or lower) in equity, 50 per cent (or higher) in fixed-income and 10 per cent (or lower) in gold.

Decumulation: It is in this phase that fixed-income plays a crucial role. Preservation of capital and stability of returns is a priority at this stage. Growth of capital is relevant, but secondary.

The ideal way to manage your cash flows in this phase is to sign up for a systematic withdrawal plan (SWP) from your mutual fund holdings. Your fixed-income holdings should gradually increase in this phase. For example, if at age 60 you had 50 per cent in fixed-income, then at age 70, it should be 60 per cent or higher.


There was indexation benefit available on investments in fixed-income mutual fund investments made till March 31, 2023. So, after retirement, when you do an SWP from investment made till March 31, 2023, you will get the benefit of indexation, as the gains will be treated as long-term capital gains after the 3-year holding period is over. So, you should hold on to these investments until your retirement, and then avail of efficient taxation.


Every asset category, whether it is equity, fixed-income, or gold, has its own features. You have to dovetail your investments to your financial plan and avail of the benefits.

Fixed-income is the optimum asset category in the retirement phase, but, it comes handy in the accumulation phase, too. 

By Joydeep Sen, Corporate Trainer (Financial Markets) and Author

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