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Which category of fixed-income funds is advisable for a retiree?

Dhirendra Kumar sheds light on the things that a retiree should consider while choosing a fixed-income fund for income

Which category of fixed-income funds is advisable for a retiree?

I am 59 and retired. I want to invest 50 per cent of the accumulated corpus in fixed-income funds to generate regular monthly or quarterly income. Which category of fixed-income funds would you suggest out of the banking & PSU, corporate-bond and credit-risk funds?
- Ashok Joshi

The bad news today is that the kind of returns one may have fetched from fixed-income funds in the past may not be replicated in the recent future. Past returns have been quite impressive, owing to the benefits of the rate cuts in the past, which translated into superior returns. When interest rates go down, the returns of bond funds appreciate and the last one year, three years, five years, which you see currently, are very handsome due to the rate cuts. Thus, if you invest with that return expectation, it will not be met. Get ready for lower returns from these funds.

Coming to your next question on the fund category, I would say that looking at the safety and the relative experience of investors, I would rank these categories in the descending order of safety as banking & PSU funds, followed by corporate-bond funds and then, credit-risk funds. However, just looking at these categories itself won't help. All these categories are filled with some good funds and some really bad funds. There are funds in each category that have assumed very undesirable risk and they have suffered. Thus, filtering the bad funds from the good ones is most important. It is important to understand what bad funds can do to your portfolio. It is not that bad funds will actually give you a little lower return. In bad funds, you may lose money and in good funds, you may get a decent return. Hence, it is very important to exercise your choice carefully. Be selective and look at the rating of a fund, exposure, the credit quality of the underlying portfolio and how careful the fund has been.

You can refer to the Analysts' Choice list of funds in the fixed-income category available to the Value Research Premium members. We have been extremely conservative with our fixed-income choices. Our analysts keep an eye on all the categories and analyse these funds very carefully. Thus, I would suggest that you should limit your choice of funds to this list because fixed-income investors are risk-averse. And if you are putting your capital at stake to generate little more returns, it is undesirable. The other rule that generally speaking every investor should follow is that don't invest in the best performing fund based on the returns delivered in the recent past, because when a fund is generating great returns, it is a result of assuming some risk and the penalty for assuming that risk may so far not be visible but it can come to hit at any time.

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