6 Types of Bonds are Good for a Retirement Portfolio
Retirement planning is a strategy to ensure you have enough income during your retired life. It entails setting aside a portion of the income earned during your young-working life for the future. Retirement planning requires one to invest a part of their income at regular intervals in a retirement portfolio.
What should your retirement portfolio include?
A retirement portfolio is a basket of investment instruments, returns from which will represent the income generation in your retired life. A good retirement portfolio will have the perfect balance of equity and debt instruments. Such a balance will ensure that the risks are spread out. However, depending upon how close you are to retirement, the proportion of these two major components would vary. Essentially, people closer to retirement should have a higher proportion of debt instruments in their portfolios. Fixed-income instruments like bonds are more secure and ensure a predictable income stream. Hence, it is more suitable for retirees.
Types of bonds for retirement planning
To build a well-diversified portfolio, it is a good idea to spread the bond component of your portfolio into various types of bonds.
Government entities like central and state governments issue government securities to borrow funds from investors. Their maturity ranges from less than a year to forty years. As these bonds are issued by the government, they have low default risk. Moreover, the government’s commitment guaranteed interest and principal payments. Hence, the security and stability of government bonds make them perfect for retirement planning.
There are different types of government bonds.
- Fixed-rate bonds – the interest rate of such bonds remain fixed until maturity.
- Floating rate bonds – the interest rate of these bonds depend on the market conditions.
- Sovereign gold bonds – These are interest-paying bonds denominated on grams of gold. They are great substitutes for investing in physical gold as the risk of theft or preservation is absent. The capital appreciation of SGBs is linked to the market prices of gold. They are also exempted from capital gains tax if they are held till maturity.
- Inflation-linked bonds – These are bonds indexed to the CPI or WPI. These bonds can be used to hedge against inflation and prevent capital loss.
- Tax-free/savings bonds – Earnings from these bonds are either exempted or eligible for tax deductions under the Income-tax act.
|Name of bond||Date of maturity|
|8.08% GS 2022||Aug-2022|
|6.84% GS 2022||Dec-2022|
|8.83% GS 2023||Nov-2023|
|8.40% GS 2024||Jul-2024|
|8.20% GS 2025||Sep-2025|
|5.85% GS 2030||Dec-2030|
|8.97% GS 2030||Dec-2030|
|6.64% GS 2035||Jun-2035|
|7.16% GS 2050||Sep-2050|
|6.95% GS 2061||Dec-2061|
|HUDCO N2 Series||Mar-2027|
|HUDCO N5 Series||Feb-2028|
|IRFC N9 Series||Feb-2024|
|IRFC NA series||Feb-2029|
|NHAI N6 Series||Feb-2029|
Corporate bodies issue these bonds to borrow funds from investors for business operations or new projects. These bonds have different risk levels based on maturity and the financial health of the issuing company. Corporate bonds usually also have a rate of return higher than government securities. They have medium to long-term maturity with a minimum tenure of one year. Corporate papers with a maturity of less than one year are called commercial papers.
The major types of corporate bonds:
- Debenture bonds – These types of bonds are unsecured and not backed by collateral.
- Mortgage bonds – These bonds are backed by physical assets like land or capital.
- Collateral trust bonds – These bonds are backed by non-physical assets like stocks and other high-quality bonds.
- Equipment trust bonds – These bonds are backed by physical equipment.
- Convertible debentures – Bondholders of such bonds have the option to convert convertible debentures into company stocks after a specified point in time.
- High yield or junk bonds – Junk bonds offer attractive interest rates but have ratings below the investment grade. Hence, these are high-risk bonds.
|9.55% CANARA BANK Perpetual||ICRA-AA+|
|7.35% INDIAN RAILWAY FINANCE CORPORATION LIMITED 2031||ICRA-AAA|
|8.62% HDFC CREDILA FINANCIAL SERVICES LIMITED 2024||CRA-AAA|
|7.45% MAHINDRA & MAHINDRA FINANCIAL SERVICES LTD 2031||CARE-AAA|
|10.5% INDUSIND BANK LIMITED Perpetual||CRISIL-AA|
|9.35% HERO FINCORP LIMITED 2025||ICRA-AA+|
|12% MUTHOOT FINCORP LIMITED Perpetual||CRISIL-A-|
These are bonds issued by the RBI on a floating-rate basis with a tenure of seven years. The minimum investment amount in RBI bonds is Rs 1000, without any maximum ceiling on investment. However, an investor is required to invest in multiples of 1000. The government launched the Floating Rate Savings Bonds, 2020 (Taxable) scheme in July 2020 for Indian investors and HUF.
These are bonds issued by municipal corporations to finance projects in their jurisdiction. There are two main categories of municipal bonds.
- General obligation municipal bonds are issued to finance infrastructure projects and general community welfare activities by the corporation. The repayment of such bonds is made from the overall revenue generated from other projects and taxes.
- Revenue bonds are issued by municipal bodies to finance special projects. The revenue generated from such special projects is used to make repayments on revenue bonds.
- Revenue bonds are issued by municipal bodies to finance special projects. The repayment of such bonds are made from the revenue generated from such special projects.
PSU bonds are issued by public sector undertakings in which the government of India has a majority stake. They usually involve medium to long-term investment obligations. Similar to corporate bonds, the credit rating of a PSU bond represents the default and investment risk.
|7.35% INDIAN RAILWAY FINANCE CORPORATION LIMITED 2031||CRA-AAA|
|8.25% UNITED INDIA INSURANCE COMPANY LIMITED 02/Feb/2028||CRISIL-AAA|
|8.55% INDIA INFRASTRUCTURE FINANCE COMPANY LIMITED 2024||CARE-AAA(CE)|
|6.14% INDIAN OIL CORPORATION LIMITED 2027||CRISIL-AAA|
|8.35% NATIONAL INSURANCE COMPANY LIMITED 2027||ICRA-A+|
|9.70% U.P. POWER CORPORATION LIMITED 31/Mar/2026||CRISIL-A+(CE)|
Capital gains bonds
Long-term capital gains (LTCG) are taxable under the Income Tax Act. However, as per Section 54EC of the act, if long-term capital gains are reinvested in certain specified ‘long term capital instruments’ within six months of sale or maturity, they are exempted from taxes.
The specified long-term assets include securities issued by certain government bodies like the National Highways Authority of India (NHAI) and Rural Electrification Corporation (REC).
|Rural Electrification Corporation||AAA Rating||5 years|
|National Highway Authority of India||AAA Rating||5 years|
|Power Finance Corporation||AAA Rating||5 years|
|Indian Railways Finance Corporation||AAA Rating||5 years|
How to invest in bonds in India?
The benefits of bonds and bonds investment are many. The convenience through which such investments can be made is another benefit. Investments in bonds can be made through stockbrokers, the web apps of NSE and BSE, or through bond platforms. Bond platforms are the new-age way of investing in bonds with confidence and security. They allow for a fully digital process, from trading account opening to buying and selling bonds. The various types of bonds available for inclusion in your retirement portfolio can be found on such platforms.
Retirement planning can be a daunting task. But bonds offer the much-needed stable and secured income generation for your retired life. Moreover, the extensive roster of bond types that are available today make them much more favourable for a retirement portfolio than equity. Depending on your risk appetite and investment horizon, you can curate a portfolio that best suits your needs and expectations. Bond platforms like Bondindia lets you create such a well-suited portfolio from the comfort of your home.