When individuals enter retirement, they mark a shift from wealth accumulation to capital preservation and stability in income flows. Without a consistent and seamless flow of regular salary, managing day-to-day spending can easily become challenging.
Expenses such as medical bills, credit card bills, personal loan EMIs, child school fees, and grocery expenses require solid and dependable sources of income. Bonds come into the picture to assist with facilitating this after retirement. They emerge as a strong candidate for retirees aspiring to seek a consistent flow of cash with minimal risk and predictability.
To put it simply, bonds are loans given to governments or private entities in exchange for periodic interest payments. The principal amount is also returned to the bond purchaser at maturity.
Furthermore, for retirees, bonds provide two primary advantages:
- Capital protection, i.e., conservation of accumulated reserves.
- Steady flow of income, i.e., interest payment as per the terms of the bond.
Unlike equities, for example, the constituents of the benchmark indices like Nifty 50, that fluctuate with market conditions and ever-evolving geopolitical developments, bonds, especially the government-issued ones, along with high-quality corporate bonds, offer fixed interest payments and assurance of principal safety.
A deeper insight into the performance of the Nifty 50 index reflects how volatile and unpredictable equities’ returns are. Over the last year, the benchmark Nifty 50 index has mostly stayed flat and given a return of -1.84%. This has been a consequence of several factors, such as Trump tariffs, the Russia-Ukraine war, and subdued results.
Bond returns in comparison offer predictability. This predictability permits senior citizens and retirees to plan their investments and long-term spending targets confidently without worrying about market volatility.
Moreover, bonds generally distribute interest semi-annually or annually, seamlessly matching the regular income needs of retirees. For example, investing ₹10 lakh in government retirement bonds with 7-8% coupon rates can easily yield about ₹70,000 to ₹80,000 on an annual basis. Such a consistent flow of income can assist in covering routine expenses.
Bonds also come with tax benefits. They offer features such as tax-free interest or deductions under Section 80CCF, helping retirees retain more of their earnings.
Types of bonds available for retirees
Retirees have several bond options to choose from based on risk tolerance and income targets:
- Government Bonds: Government bonds are considered the safest bonds. They provide investors with a ‘sovereign’ guarantee, and the chances of default are negligible. These include Floating-Rate Bonds, Fixed-Rate Bonds, and Treasury Bills issued by the central and state governments. Sovereign Gold Bonds, i.e., SGBs, permit indirect investment in gold with fixed interest (2.5% per annum) along with capital protection.
- PSU bonds: These are tax-free bonds issued by government entities such as NTPC Limited, Power Finance Corporation, and Indian Railways Finance Corporation. The offered coupon rates are between 7.5% and 9%. These bonds are a prudent option for long-term investors seeking stable returns.
- Corporate bonds: High-ranked corporate bonds from reputed institutions such as Kotak Mahindra, HDB Financial, and Poonawalla Fincorp, among others, provide higher yields (in the range of 9-11%) but carry moderate risk compared to government securities.
Key benefits of bonds for retirees
- Bonds provide a predictable income stream through fixed or floating payments.
- Protect capital with lower risk compared to stock market investments.
- Provide tax benefits that can further propel net returns for retirees.
- Provide diversification of portfolios for investors that reduces exposure to market, risks and volatility.
- Ensure seamless liquidity options for emergencies without penalty, unlike many fixed deposits.
Platforms such as RBI Retail Direct and IndiaBonds permit retirees to subscribe to different kinds of bond instruments. Hence, by selecting a mix of government, corporate, and PSU bonds according to their financial goals and individual risk-taking capacity, retirees can ensure that they can secure a stable, worry-free post-retirement income stream.
Thus, bonds remain a prudent choice for retirees who aim to enjoy financial peace and prosperity while steadily and securely covering their post-retirement needs.
Finally, any investments in bonds should only be considered after proper due diligence and consultation with certified financial advisors, as these investment asset classes come with inherent risks such as interest rate risk, credit risk, inflation and liquidity risk.
Disclaimer: This article is for informational purposes only and does not constitute financial advice. Bond investments carry risks, and past performance is not indicative of future results. Readers should consult a financial advisor before making investment decisions.
