In today’s times, it is not difficult to understand the phenomenon of people looking forward to the prospect of retiring. Sure, the splendour of youth would no longer be there, but at least one can stop worrying about having to work and finally prioritise the finer pleasures of life! However, achieving this vision requires careful financial planning to ensure a comfortable and secure post-retirement life.
While a number of avenues exist to help realise this possibility, one robust way to ensure good financial health after retirement is to invest in bonds. Why? Let's delve deeper.
How do bonds fare in comparison to direct equity and mutual funds?
While it is easy to argue that investing in direct equity or mutual funds leaves room for the possibility of higher returns, it is pertinent to also acknowledge that these options are also prone to higher risks. Though, fluctuations also occur in bond prices, but these are accompanied by corresponding enhancements in the coupon rates. In other words, regardless of the changes that characterise the larger economy, bond investments ensure that your risks are more or less defined. The higher risks associated with the former also make them an unreliable source for regular income. Veritably, with the exception of zero-coupon bonds, the decision to invest in bonds addresses this by ensuring that the cost of one’s post-retirement life is managed efficiently through recurring and timely interest payments.
Therefore, it is advisable to opt for bonds over direct equities and mutual funds if the avoidance of perpetual uncertainty regarding the management of one's cost of living post-retirement is deemed non-negotiable.
Diversification with Bonds:
The enduring wisdom advising against placing all assets in a single investment has been recognized for generations. Regardless of one’s primary preferences, in current times, there is a broad consensus among experienced investors that diversifying one’s portfolio with varying candidates is key to sustainable long-term financial health. To preserve your energies for a stress-free life after retirement, you may be inclined to invest a better part of the investable pool of money in traditional avenues like fixed deposits (FDs) but, it is important to understand that your decision doesn’t have to adhere to an either/or paradigm. It’s possible to redistribute your investments by genuinely considering viable secondary choices, like bonds which promise comparatively higher returns with a low threshold of risk.
On the other hand, if your first preference has always been in dealing in high-risk options like direct equity, it is likely for the habit to spill over into your post-retirement life. Even during these situations, additionally opting for bonds by restructuring the investment portfolio would certainly allow you to hedge your bets more conveniently. For instance, purchasing corporate bonds can greatly help in altering the risk profile concerned with your portfolio, while also ensuring that the time spent in researching market fundamentals is aptly rewarded.
In this respect, the transferability of bonds proves to be especially helpful. The general absence of lock-in periods, coupled with the prevalence of convertible bonds, make it possible to devise a fool proof and quick exit strategy with a view to deal with future contingencies.
Tax Benefits:
A defining upside concerned with investing in bonds is the high likelihood of saving taxes - a feature that several other options lack. Notably, several government bonds offer coupon payments that are non-taxable. More often than not, these nuances are not accounted for while calculating the net returns concerned with a bond investment. Crucially and understandably, this markedly lessens one’s financial encumbrances after retirement.
Wealth Preservation for Beneficiaries:
The consideration of our legacy and the welfare of our loved ones is a prevalent and enduring concern, particularly among those who are also parents. This contemplation gains further prominence as we approach retirement. Even in this respect, it is worthwhile to acknowledge the advantages manifest in bond investments. Not only do they help you in preserving your capital, but it also ensures that the invested corpus never stops growing at a steady rate.
Where do we go from here?
With the bond market in India crossing the 2 trillion dollar mark, one would be justified in concluding that the sector is alive, well and thriving! Especially now, with consistent advancements in the fields of market research and the formulation of credit ratings, today’s investor harbours the capacity to be less hesitant about traversing new territories. If bond investments are roads that haven't yet been chosen, maybe the prospect of retirement should prompt you to reconsider your existing investment mantras.
Disclaimer: The contents in the article should not be construed as tax or financial advice. Readers should seek advice from their tax or financial advisor before making any investment decision.