IFAs mostly do not go through this dilemma. For them only bond funds make sense. However bond funds have one major problem – a fluctuating nav dependent on the existing interest rates. Actually this should not matter to you as an investor, but if your duration need and the duration of the fund may not be congruent.

So should you use bonds in a retirement basket? Will it be good or will it hurt.

Recently I put in a lot of money into the bonds for many of my friends who are past their retirement age. For me the minimum cut off was 64 years of age. As I had said in an earlier post I converted a lot of high PE stocks like Fmcg to psu bonds which are giving 8% TAX FREE interest. These had maturities of 5, 10, 12, 15 and 20 years. If I can secure the income for such a long period, I have some advantages. Unlike a bond fund this value will not fluctuate for a ‘hold to maturity’ investor. I may have compromised on liquidity, but the amounts are about 10%-20% of their portfolio, and I did not worry too much about liquidity. I am also convinced that I will be able to do some market making for a combined portfolio of about 20 crores.

Most investors are worried about outliving their corpus. Investing in a combination of high quality equities, equity funds and such a good quality bond fund (remember the sovereign guarantee) is a nice way of ensuring good cash flow from the bond funds and inflation being taken care of by the equity funds. The predictability of returns and principal means the investors are sure about the date on which the interest will come and the date of the redemption. I hope to buy annuities from the sale proceeds on the date of the maturity. Look at this: If a 62 year old invests Rs. 15L in NTPC bonds. Now 20 years later this is going to look very small but not insignificant. So if I buy an annuity for life with ROP or without ROP I will get very good rates, and SURETY of an annuity ladder.

If a person can put Rs. 1 crore in such bonds, we are talking of generating an income of Rs. 8L per annum…add to this the income from dividends and he is taken care of well for a few years without drawing from the capital. There are many advantages of creating such a portfolio – gives peace of mind to the investor. Income is tax free. Dates of interest and dates of redemption are certain. No risk of principal / Interest. Not even delay risk…what is it that you do not like about this?

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  1. Sir,
    This is an amazing eye-opening article. Though I don’t technically qualify into the retirement zone, I am actually building a back-up portfolio like you have described. Right now, I am trying to put enough money in Tax Free Bonds (need to get more serious about this), so that the interest can fund my kids’ education.

    I feel this is a good strategy everyone can adopt to get some tax-free income.

  2. Dear Subra,

    Lot of kudos to you for such simple and wonderful insights for creating Retirement Portfolio. I believe 10-25% of such Tax Free Bonds should be included in a retiree’s Portfolio. Surety of annual income on a particular date without the liability of Tax is indeed a piece of mind.

  3. Why just retiree income…I am 36 yrs of age and try to follow Graham’s advice of having debt in the portfolio…so now, when I look at options available, EPF and PPF get exhausted for me…next best is Tax free bonds, and hence, I am trying to move some part of my FDs into them. I still have FD as I would need liquidity but i have earmarked some percentage of the portfolio to go into tax free bonds…make hay when the sun shines (as these bonds dont come out that very often)

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