Bonds for Retirement

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When you think of creating a portfolio of assets for retirement planning, it’s typical to consider investment options like direct equity, mutual funds and even the Public Provident Fund (PPF) scheme. Few investors look into investing in bonds for retirement. This is unfortunate because when chosen smartly, bonds can be effective financial tools that help secure your post-retirement income. 

If you are unsure of how to use bonds and bond funds for retirement planning, this article can help you make sense of the way ahead. To understand how to use bonds effectively, it’s crucial to first be aware of what they are and how they work. 

A Closer Look at Bonds in India

Bonds in the Indian market are debt instruments that are issued by the government or by companies registered in India. When you buy a bond as an investor, you are effectively lending money to the entity that issued the bond. This works like a loan, which is why the instrument is categorised as a debt security. 

The defining characteristic of the typical bond is that it offers guaranteed returns on the investment. The issuing entity pays interest to the investor (who is effectively the lender). These interest payments, also known as coupon payments, are made periodically at regular intervals. Generally, bonds pay interest annually. However, some bonds pay interest on a semi-annual basis too. 

Most bonds also carry a maturity date. Upon maturity, the principal or the face value of the bond is repaid by the bond issuer. This sums up the cash flows investors can expect from the average bond. There are also other special types of bonds like zero coupon bonds, which offer no coupon payments but are instead issued at a discount and redeemed at the par value. 

Top Reasons to Include Bonds in Your Retirement Portfolio

Bonds have many defining features and offer several benefits that make them highly suitable for people who have retired. If you are in the process of drawing up a financial strategy for your golden years, here are the top reasons to invest in bonds for retirement planning. 

  • They Help Preserve Your Capital

One of the primary reasons for investing in bonds for retirement is to preserve the corpus you have accumulated during your working years. While your working years are to grow this capital, your post-retirement years are to preserve it. By ensuring your capital is safe, you can not only continue to use it to generate income, but you’ll also be able to leave behind a sizable inheritance for your loved ones. 

Since the amount invested in bonds is repaid at the time of maturity, the capital is well-protected. However, with high-risk bonds, there is a possibility that the company may declare bankruptcy, leading to a loss of the capital amount. You need to keep this in mind when you are choosing bonds for retirement. 

  • They Offer Stable and Guaranteed Income

Another important reason to include bonds and bond funds in your retirement planning is income generation. Once you retire, you will no longer have the primary income from your job to rely on. In the absence of this source of earnings, you will have to rely largely on the returns from your retirement fund and the assets that it includes. 

Bonds are among the most suitable investment options in this regard. Since they offer guaranteed income at periodic intervals, you can use the coupon payouts to augment your post-retirement income. What’s more, the annual coupon payment is typically known upfront, so you can use this information to plan your finances smartly. 

  • They Also Help Save Taxes

If one of your main post-retirement financial goals is to secure multiple sources of income without attracting high tax rates, bonds can be excellent options to consider. Tax-free bonds, in particular, offer interest payments that are exempt from tax. This gives you the dual advantage of earning regular income without increasing your overall tax burden. 

In addition to this, bonds issued by certain government-backed companies also offer tax benefits up to Rs. 20,000 under section 80CCF of the Income Tax Act, 1961. You can choose different bonds and take advantage of both these tax benefits to enjoy tax-free coupon payouts and gains. 

  • They are Low-Risk Investments

When you retire, your appetite and tolerance for risk typically reduce drastically. Your priorities shift from capital accrual to capital preservation. This means most of your assets must be low-risk options. Bonds fit this category perfectly because they carry much lower risk than market-linked instruments such as equity shares. 

To maintain a low exposure to risk in your portfolio, you can consider both bonds and bond funds in your retirement planning. Even among bonds, some types like government bonds and PSU bonds carry lower risk than corporate bonds. You can also include inflation-indexed bonds in your portfolio to enjoy a hedge against the decreasing value of money over time. 

  • They are Easily Transferable

If you have legal heirs to whom you want to entrust your assets after your passing, some assets are easier to transfer than others. Fortunately, bonds belong to the former category. In most cases, you can ensure that the benefits of your bonds are transferred to your legal heir simply by adding them as a nominee in your investments. 

This saves them the trouble of going through various legal formalities during a period that may already be emotionally stressful. Bonds are also fairly liquid and can be sold in the secondary market, making it easy for your legal heirs to liquidate the holdings if needed. 

Conclusion

To sum it up, bonds can be extremely useful if you want to secure a steady source of income for your port-retirement years. What’s more, they are also less risky than market-linked assets like equity and equity funds, making them ideal for you if your risk profile grows more conservative with age. 

You can make use of the tips outlined in this article to purchase bonds for retirement income planning. While you’re at it, you could also look into investing in bond funds for your retirement portfolio.

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