Financial planning for retirement broadly involves two phases: accumulation and decumulation. The former involves earning, saving and investing, and the latter involves drawing from the corpus fund. However, there are sub-parts as well. For instance, during the accumulation phase, you may spend money on multiple financial goals. Then, there is also the consolidation phase.

If you are around 55 to 60 years old, you may want to move away from the riskier, volatile assets to defensive assets to de-risk your portfolio in your golden years after retirement.

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

Also Read: Why SWP Can Be A Better Alternative To Lump Sum Withdrawals

What They Offer

Stability: Returns from fixed-income funds are relatively more stable than equity funds. Bonds or bank deposits, where they invest, have a fixed interest rate, which is considered in the daily net asset value (NAV) computation. In equity funds, the dividend is taken in the NAV only when it is paid. Price volatility in the equity market is also relatively higher. 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 mutual funds, target maturity funds (TMFs) have a defined maturity date and an estimate of the returns. For the usual open-ended fixed-income funds, provided you hold them for an adequate period, you will get decent returns with reasonable visibility.

Parking: Your portfolio should have certain short-horizon investments say, 5-10 per cent of the total. You should keep this in fixed-income funds and, within that, in conservative avenues like liquid funds. These short-horizon sums have to be parked in appropriate fixed-income funds.

Capital Preservation: When prices in the market come down to a level lower than the asset’s purchase price, it is regarded as a “paper loss”—it will become a real loss if you sell it at that price. However, capital preservation is sometimes a primary objective, mainly for retired people. So, even a paper loss may be difficult to digest. Fixed-income funds provide capital preservation.

Planning Phase

Accumulation: In the accumulation phase of your career, since you are younger, you have a higher risk appetite and time on your side. So, you can allocate to more risky assets, such as equity. Note that your allocation is a function of your horizon and risk appetite. For instance, if you are 40 years old, the equity allocation should be 60 per cent.

Consolidation: When nearing retirement, you must gradually de-risk your portfolio. There is no definition as such for the consolidation phase; it may be taken as age 55-60, assuming you would retire at 60. At that age, since you do not have any active income and will draw from your investment kitty, the allocation 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: In this phase, 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. In this phase, the ideal way to manage your cash flows 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.

Taxation

An indexation benefit was available on investments in fixed-income mutual fund investments made until March 31, 2023. So, after retirement, when you do an SWP from the 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.

The writer is an author and a corporate trainer (financial markets).

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