Last Updated on October 10, 2019 at 11:58 am
Everyone agrees that a good amount of equity exposure is necessary for building a retirement corpus capable of handling inflation when income from employment stops. This can be done via some mix of equity mutual funds and direct equity. What about the fixed income or debt part of the portfolio? Let us consider the investment options available in this space for accumulating a retirement corpus.
There are some considerations before we discuss the choices available. Many have a debt-heavy corpus. That is most of the assets associated with retirement are locked in PPF or EPF because they did not start investing in equity for many years after starting work. This is an extremely difficult situation to handle and let us consider this first.
For such investors, if retirement is a good 15 years or more away, they should focus on quickly increasing equity exposure by investing only in equity going forward (aside from the mandatory EPF/NPS deduction). They should (everyone should) reduce the NPS equity exposure to zero and make it a pure debt mutual fund with a mix of govt and corporate bonds (50:50 or more of govt bonds as per comfort).
Sadly, unless the income is significantly high, increasing equity exposure only from future investment alone will take years and years. They should also redeem from PPF (assuming it is 7+ years old) to get equity exposure as high as possible. One of the most important driving factors behind my financial independence is the equity exposure was quickly made higher than NPS (in my case it a debt fund from day one).
🔥Secure your future with our Robo-advisory tool trusted by over 3,500 investors and advisors. From effortless retirement planning to funding your children’s biggest dreams, turn your financial goals into reality. 🔥
Subscribe for money management solutions via email! (Link takes you to our email sign-up form) Join 32,000+ readers in our community.
👉 New Tool Alert! NaviPlan: A Privacy-Focused Multi-asset Tracker and Goal Planner 👈
However, many are scared to do this. They would argue tax-free 8% return is more valuable than the risk of investing in equity. The price you pay when you take on risk is obvious, but the price of sticking with fixed income can hit you hard late in life. So think hard about this.
For those who have just started their investing journey, this is a big lesson. EPF or VPF is a fantastic investment only as long as you stay within the necessary asset allocation. If 60-70% of your corpus is EPF and you only in your 30s or early 40s, you need to take quick action to ensure you can accumulate enough for retirement.
Assuming 60% in equity and 40% in fixed income in the initial phase of investing and gradual increase in fixed income allocation, later on, a good chunk of that fixed income can be EPF + VPF, NPS or PPF (esp for those who do not have regular income). Learn more about the importance of the gradual increase in fixed income here.
List of Fixed Income Investment Options For Retirement (or any long term goal)
- EPF
- PPF
- Recurring deposits
- Fixed deposits
- arbitrage mutual funds
- money market debt funds
- gilt debt funds
- short to medium-term bond funds
- Bonds
It is quite possible with age and familiarity, an investor can graduate from FDs to debt funds to money market funds to medium-term funds. That is, our risk appetite increase (or decrease).
Standard fixed income options like EPF and PPF are good for the initial few years of investing. Sooner or later there would be a bumper year in equity with a gain of 50%, 80% etc. When that happens, a resetting of the asset allocation is prudent.
That is, a partial profit book from equity into … where? If we add that to PPF or VPF, liquidity is lost. That is we cannot freely remove that money and add it back into the market when it goes down (and it will). Even otherwise a freely redeemable fixed income solution is necessary.
Say what you may, debt mutual funds do make a big difference. So do arbitrage mutual funds but one should keep in mind that they too have credit risk like debt funds.
These arguments are also valid for any long term goal. For my son’s education goal, I have added an arbitrage fund (ICICI) as the debt component. It is tax-efficient and liquid. If there is a big dip in the stock market, I have the option to sell the arbitrage units and buy equity funds. Having this choice is crucial. The primary reason for this is to lower risk. Higher returns if any is only an accessory.
Recurring deposits and fixed deposits can be terribly tax-inefficient for those in the 20% and 30% slabs. Primarily because the gains have to declared and tax paid each financial year. A debt mutual fund is a natural choice.
There are three options with debt funds:
- Stick to money market funds like liquid, overnight or very short-term bond funds with reasonable credit quality. The risk of loss is low(er) but over the long term, returns will gradually head south.
- Avoid all credit risk and use only long term gilt funds. See for example SBI Magnum Constant Maturity Fund: A Debt Fund With Low Credit Risk for long term goals! The NAV here will be highly volatile and the investor must practice and mix of annual rebalancing (aka strategic) and tactical rebalancing as per bond yield movements. This does not involve much effort.
- Take on a mix of credit and interest rate risk. The management effort is less, returns can be higher than money market funds but there is always a risk of bond defaults. To negate that, choice of fund selection and monthly monitoring of the portfolio is crucial.
It is important for investors to understand that there is no escape from risk whatever choice they make. It is only a question of familiar risk vs unfamiliar risk. Comfortable risk vs uncomfortable risk. Sadly, when it comes to returns, we study the past and take it seriously. When it comes to risk, we ignore the past and assume what did not cause a loss is not risky (more on this coming up).
There is an important aspect of fixed income portfolios that many of us do not consider. Even if choose only PPF or EPF, I still need a liquid fund or overnight fund or arbitrage fund for two reasons : (1) booking profits and re-entering equity and (2) as we near retirement or the goal deadline a good chunk of the corpus should be in safe instruments.
Summary: Factors to keep in mind while building a fixed income portfolio
- Tax efficiency is crucial. However, if you choose tax-free then there will be a lock-in
- A liquid instrument is essential for rebalancing.
- Liquid fund or bond fund or gilt fund, there is always a risk. It is only a question of what is acceptable to you.
- Money should be shifted to a safe instrument (preferably with lower tax outgo) as the goal deadline approaches. An overnight fund or liquid fund fits the requirement. Systematic transfer to these assets can reduce tax outgo.
What is your fixed-income strategy? Share below. Are you overweight on fixed income how do you plan to handle this?
We are on Google News
Use this button to add freefincal.com as a preferred personal finance source on Google News. 
Add freefincal as a preferred news source
You can also follow freefincal on Google News. 
Explore 1,000+ videos on YouTube!
Subscribe to get posts via email!
Join 32,000+ readers and get free money management solutions delivered to your inbox! (Link takes you to our email sign-up form)Join our WhatsApp Channel
Explore our products
🔥Join our community of 9000+ users! 🔥 Use our Robo-advisory Tool to create a complete financial plan! More than 3,500 investors and advisors use this! Use the discount code robo25 for 20% off. Plan your retirement (early, normal, before, and after), plus non-recurring financial goals (such as child education) and recurring financial goals (such as holidays and appliance purchases). The tool helps anyone aged 18 to 80 plan for retirement, plus six non-recurring and four recurring financial goals, with a detailed cash flow summary. Our Flagship Course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! More than 3,500 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market conditions! Watch the first lecture for free! One-time payment! No recurring fees! Lifelong access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence. Join the freefincal investor circle! An exclusive space for investors, advisors, fintech employees and students to access financial planning and insurance tools, mutual fund and stock analysis tools, coding strategies and Excel macros for data extraction. 750+ members are now part of our investor circle. Increase your income by getting people to pay for your skills! More than 900 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner seeking more clients through online visibility, or a salaried individual looking for side or passive income, we will show you how to do it by showcasing your skills and building a community that trusts and pays you. (Watch the 1st lecture for free). One-time payment! No recurring fees! Lifelong access to videos! Track your mutual funds and stock investments with our Google Sheet! We also publish monthly screeners for- Equity mutual funds
- Debt and hybrid mutual funds
- Index funds
- ETFs
- Momentum and low-volatility stock screeners
Our Podcast: Let's Get Rich With Pattu
On Spotify: Let's Get RICH With PATTU! Every single Indian CAN grow their wealth!
Audible Link: Listen to the Let's Get Rich with Pattu Podcast
You can also watch podcast episodes on the OfSpin Media Friends YouTube Channel
Listen to the Let's Get Rich With Pattu podcast on YouTube.
Now watch Let's Get Rich With Pattu தமிழில் (in Tamil)!About The Author
Dr M Pattabiraman giving a lecture
Dr M. Pattabiraman (PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over 14 years of experience publishing news analysis, research and financial product development. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free, AUM-independent investment advice. Connect with him via Twitter(X) LinkedIn YouTube Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (Published by CNBC TV18) for DIY investors. 
This book helps you ask the right questions and find the right answers. It also includes nine online calculators to create custom solutions.
(2) Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want. 
Both the boy and girl versions of "Chinchu Gets a Superpower".
Most investor problems stem from a lack of poor decision-making. We made bad decisions and money mistakes when we started earning, and we spent years undoing them. Why should our children go through the same pain? What is this book about? As parents, what if we had to groom one ability in our children that matters not only for money management and investing but for every aspect of life? My answer: Sound decision-making. So, in this book, we meet Chinchu, who is about to turn 10. The story follows what he wants for his birthday and how his parents plan it, while also teaching him key ideas about decision-making and money management. What readers say! 
Feedback from a young reader after reading Chinchu Gets a Superpower!
Must-read book even for adults! This is something that every parent should teach their kids right from a young age. The importance of money management and decision-making based on their wants and needs. Very nicely written in simple terms. - Arun.
About freefincal & its content policy
Freefincal is a News Media organisation dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact Information: To get in touch, please use our contact form. (Sponsored posts or paid collaborations will not be entertained.)Our publications
Your Ultimate Guide to Travel
