A reader says, ” I am a 41-year-old self-employed person. I have been following your blog for 2 years. I wish to retire by age 55. I am following a rebalancing and derisking strategy in my retirement portfolio. My debt portfolio is 10% in constant duration gilt fund, 15% in dynamic gilt fund, rest in FD, RD, NSC, etc.”
“I plan to shift money from gilt funds into money market funds as I approach retirement age of 55 as it is less volatile than gilt funds. My question is, at what age should I start this shift and spread it over how many months or years? Is this strategy a wise one or an unnecessary exercise?”
It is music to my senses to read a message from a reader who appreciates the importance of essential portfolio management tasks like rebalancing and systematic de-risking.
Just like one need not reduce equity to zero at retirement if the corpus is big enough (some would argue one should not), one need not reduce gilt fund exposure to zero at retirement.
We shall assume that a “dynamic gilt fund” refers to a normal gilt fund (almost all behave as dynamic bond funds). Also see:
A 10Y constant duration gilt fund will be significantly more volatile (and risky) than a gilt fund. The former always holds long-duration bonds regardless of interest rate cycles. They would be quite rewarding when rate cuts are announced/expected but can lose quite a bit when rate hikes are announced/expected. They can also go through long periods of sideways NAV movement during uncertain economic conditions.
Therefore we recommend the following:
- Wait until the interest rates start falling. When this happens the price of existing bonds (with higher interes rates) willl start moving up. The 10Y constant duration bond fund would give good gains. Then (before there is a plateau in the rates) shift from this fund to a money market fund. You can also partially shift to a normal gilt fund.
- If you don’t mind reasonable risks, you can also consider shifting to a corporate bond fund since there is enough time left for retirement. A corporate bond fund (small exposure) can also be held after retirement.
- The shift to a money market fund can wait until retirement or when you need to withdraw systematically from it for expenses.
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Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
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