With rising inflation and healthcare costs, relying solely on fixed deposits may not suffice in retirement. Debt funds can generate regular income while also maintaining growth to combat inflation. A prudent mix of debt and equity can help create a Rs. 5-crore nest egg.

Most debt mutual funds continue to give poor returns

Understanding debt fund categories

Debt funds invest in fixed-income instruments like bonds, G-secs, etc. They are less volatile than equity funds. Categories include short duration, corporate bond, dynamic bond, gilt funds, etc. Duration, credit risk appetite, and liquidity needs determine suitable debt funds.

Benefits of debt funds over bank FDs

Debt funds can generate higher post-tax returns than fixed deposits. They offer the added flexibility of withdrawal anytime (except gilt funds’ 3-year lock-in). Debt funds provide better liquidity than lock-ins of 5-10 years in bank FDs. Diversification across sectors and companies reduces risk.

Creating an income plan from debt fund SIPs

Start by determining your required monthly income needs in retirement. Assuming expenses of Rs 50,000 monthly, you need Rs 60 lakhs annually. With a 4% withdrawal rate, a debt corpus of Rs 1.5 crores can sustain this income. Investing Rs 30,000 monthly in short-duration funds can build this in 15 years.

Balancing growth and income needs

The debt funds income plan caters to your needs for 5-7 years. For long-term growth against inflation, allocate the balance corpus to equity and hybrid funds. Choose index, large-cap mutual funds with lower volatility. Maintaining 40% in debt and 60% in equity can balance income stability and growth.

Mitigating risks in debt investing

Debt mutual funds carry some credit risk based on underlying bonds. Opt for higher-rated instruments and diversify across sectors to minimize risk. Limit exposure to riskier funds like credit opportunity funds. Analyze portfolio duration and exit schemes with extended maturity as you near goals. Maintain emergency reserves to avoid liquidating debt funds in downturns.

Rebalancing debt and equity allocations

Review allocation periodically, around every 6-12 months. Redeem equity gains to allocate more to debt as you near retirement. Or redeem debt to give more to equity if there is a shortfall. This buy low and sell high approach helps achieve corpus targets. Debt provides stability, while equity helps beat inflation.

Withdraw smartly using SWP.

Set up systematic withdrawal plans (SWPs) to draw income instead of lumpsum redemptions. SWPs withdraw a fixed amount periodically while retaining the fund units. This allows the remaining teams to continue growing. Arrange SWP payout cycles to meet periodic expenses.

Watch out for interest rate risks.

Rising interest rates can impact debt fund NAVs in the short term. Mitigate this with faster duration funds like banking PSU funds with 6–12-month maturities. Laddering maturity also helps limit interest rate risk. Dynamic bond funds proactively manage duration based on rate outlooks.

Debt mutual funds can optimally build your income corpus and supplement growth from equity funds on the pathway to 5 crores. Maintain balanced allocations across debt and equity to achieve your goals.