Financial planning for retirement can be broadly divided into two phases: the accumulation phase when you are earning, saving and investing, and the decumulation phase, when you are drawing from your investment kitty. There are also sub-parts to this: during the accumulation phase, there are multiple financial goals on which you spend money, and for which you need to plan. But between these two phases, there is also the consolidation phase. Here, say from age 55 to 60, you gradually move from riskier assets, which are more volatile, to the defensive assets to de-risk your portfolio in your golden years after retirement.
Let’s see how fixed-income funds can help you in the financial planning process in this stage.
What They Offer
Stability: Returns from fixed-income funds are relatively more stable than equity funds. The reason is that fixed-income instruments, such as bonds or bank deposits have a known rate of interest, which is taken into account in the daily net asset value (NAV) computation. This is, however, not the case with equity funds, where dividend is taken in the NAV only when it is paid. Price volatility in the equity market is also relatively higher, which makes the NAVs of equity funds fluctuate more. 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 case of mutual funds, target maturity funds (TMFs) have a defined maturity date and an estimate of the returns, which is somewhere around the initial portfolio yield-to-maturity (YTM). YTM data for funds are available in the monthly factsheet.
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