Are Treasury Bonds a Good Investment Option for Retirement?

Are Treasury Bonds a Good Investment Option for Retirement?

The Central and State Government of India issue debt instruments in a bid to meet their capital expenditure. In exchange, such investment instruments promise to repay the invested sum over a specific period of time, along with interest. 

One of these debt instruments is treasury bonds, a preferred investment instrument for individuals seeking steady returns. But is an investment in treasury bonds suitable for those approaching their retirement years? 

Let’s find out.

Are Treasury Bonds A Good Investment Choice In 2021?

Treasury bonds are considered to be a sound investment for young investors as well as those nearing or in retirement. These investment instruments offer a fixed rate of interest that is paid periodically until the bond matures, thereby maximising safety for investors. As a result, this investment instrument is suitable for any investor who wishes to earn steady interests.

When investing in bonds, investors are advised to bear a few points in mind, such as the following:

  • The type of bond
  • Amount of interest paid by the bond 
  • Maturity period

In addition, it is imperative for investors to weigh their risk-taking capacity. They must also consider the bond’s risk of default, which implies that the bond issuer might fail to repay the investment. However, prospective investors should note here that treasury bonds are guaranteed by the government.

Here are some benefits of investing in treasury bonds:

  • These bonds are an apt investment instrument for risk-averse investors.
  • Given their low level of associated risk, one can protect his/her investment from market volatility.
  • Individuals who are heavily invested in stocks can diversify their portfolio

A Comparative Analysis Of Investing In Treasury Bonds

Take a look at the below table to gain valuable insight into treasury bond investment for investors belonging to different age groups. 

An Investor Aged 25 Years An Investor Aged 60 Years
  • While investing, young investors tend to be in an accumulation phase that encourages them to take more risks and save up for retirement. 
  • A young investor investing in bonds is likely to generate a fraction of the average stock market returns over the upcoming 40 years.
  • As he/she is in a better position to absorb market fluctuations, investing in these bonds is suitable but not the best bet.
  • On the other hand, most investors nearing or in retirement prefer protecting their savings. So, they typically allocate a considerable chunk of their portfolio towards income-producing and conservative investment. 
  • With the years of retirement inching closer, a 60-year-old investor does not have enough time in hand to recover from losses arising due to a bad market combined with an aggressive portfolio.
  • For older investors, an investment in treasury bonds makes more sense as they offer higher security and stable returns. 

Therefore, it is wise for retirees to buy treasury bonds in India if they want to generate an income stream before or during retirement. In fact, it is advised that as investors get older, they can shift away from stocks and turn to bonds, provided that they do not dump their stocks completely.

Moreover, when you make an investment in treasury bonds, it alters your portfolio allocation. As a result, the portion of your portfolio that comprises bonds will increase. As a result, the portfolio tends to become a bit more conservative and provides more safety. 

Tip: When planning an investment in treasury bonds, one can consider employing a ‘bond ladder’ strategy. It involves purchasing multiple bonds with staggered maturity dates, wherein a bond reaches maturity in a consecutive year. As a result, this approach provides an investor with returns on each date of maturity.

Points To Consider Before Investing In Treasury Bonds

Before you invest in these bonds, it is critical to note the following:

  • As one can sell treasury bonds before maturity, their price during the sale can be lower than their original purchase price. 
  • Investors are guaranteed only the principal sum when they hold treasury bonds until maturity.
  • Treasury bonds are exposed to opportunity cost, implying that they may underperform in the case of a rising-rate environment.
  • Income from interest earned from these bonds can come with a lower rate of return compared to other investment instruments.

So, if investors desire a strong buffer against market volatility, reduced risk of capital loss, and access to diversification, they can park their money into treasury bonds. However, if they have set their eyes on higher returns than treasury bonds, they can also add corporate bonds to their portfolio. 

Note that one can easily invest in corporate bonds online through leading fintech companies, such as KredX. With KredX, investors can choose from a range of bonds and purchase their preferred number of units via an easy online process in no time. 

Bottom Line

Investors can consider exposure to treasury bonds as part of a balanced portfolio when they are in or near retirement. Investment in treasury bonds can reduce the associated risks of investment, tackle market fluctuations, and provide steady returns. 

That said, investors who seek higher returns than treasury bonds without compromising on other benefits can opt for corporate bonds. Moreover, they can leverage platforms like KredX to experience a simple and seamless digital process while investing.