How to get fixed income right for your retirement?

Reader's question: I invest in large-, mid-, small- and flexi-cap funds through SIPs. I have also invested about 2 per cent in gold and silver ETFs for diversification. For my retirement goal (more than 10 years away), I want to add fixed-income instruments such as debt, arbitrage or hybrid funds for further diversification. Should I choose pure debt funds, arbitrage funds, hybrid funds or a mix of these, considering my long-term investment horizon – Saumesh Kumar

For many mutual fund investors focused on long-term wealth creation, equity funds are the natural choice. While they can be volatile in the short term, staying invested has paid off well over time.

However, when investing for retirement, the objective shifts from growth to stability. That raises an obvious question: Which fixed-income options best serve a retirement portfolio?

In this context, we examine whether our reader should turn to hybrid funds, arbitrage funds or debt funds to build a more balanced and reliable retirement corpus.

Why hybrid funds don’t make the cut

Hybrid funds try to provide the best of both worlds: the equity part provides growth, while the debt component cushions your portfolio during downturns.

However, in the reader’s case, where they already have multiple equity funds, adding a hybrid fund wouldn’t materially impact their portfolio’s performance.

Now, one may ask, “Aren’t conservative hybrid funds a sensible choice?” Though investing in them sounds good, owing to their higher debt allocation, they are taxed like debt funds. In other words, gains on conservative hybrid funds will be taxed as per your income tax slab. And their gross equity exposure is too low to qualify for equity taxation.

Arbitrage funds: Good but not good enough

Arbitrage funds are a type of hybrid fund that invest at least 65 per cent of their assets in equity, with positions hedged through derivatives. They are treated as equity funds for tax purposes, making them attractive for short-term holding periods and for investors in higher income tax slabs.

Though less volatile than a pure equity fund, arbitrage funds’ returns fluctuate wildly with changes in the size of spreads and the underlying nature of their investments, which are highly speculative.

Their returns haven’t been remarkable, either. Over average one-year daily rolling returns since January 2013, arbitrage funds delivered just 6.6 per cent.

Short-duration funds: An ideal choice

Though debt mutual funds don’t earn as much as equity funds, they are low-risk and stable, with many categories reporting no negative returns over long periods.

Of these, short-duration funds have emerged as a suitable option for building your retirement portfolio. Since January 2013, the category has delivered an average one-year rolling return of 7.6 per cent. More importantly, there was not a single negative return over any one-year holding period during that period.

This is the finding that matters. Short-duration funds did not ask investors to give up returns in exchange for stability. They delivered both. That makes them the clearest choice for the core fixed-income allocation in a long-term retirement portfolio.

Liquid funds have a distinct role at the more conservative end. Their average one-year rolling return of 6.5 per cent is lower than that of short-duration funds, but their purpose is different: they belong at the most accessible, most stable corner of your portfolio’s non-equity allocation — for money that must stay liquid. The slightly lower return is the fair cost of that predictability.

Summing it up

To reiterate, the reader doesn’t require any additional equity allocation in their portfolio, implying that pure equity or hybrid funds should be ruled out. What the portfolio needs is stability, low risk and decent returns. And for that, debt funds, particularly short-duration funds, are the ideal choice, given their modest yet steady returns in the long run.

If you want to know which short-duration funds to invest in, check out Value Research Fund Advisor and get our list of analyst-backed recommendations, along with in-depth insights into fund performance, long- and short-term returns and personalised portfolio guidance. So that you know how to build your retirement corpus the right way.

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This article was originally published on March 18, 2026.