Bond investments generally come with clearly defined time-frame. Though some bonds are listed and traded in secondary market, in most cases, you have to be prepared to hold on to your investments till maturity. That makes many individuals to frown at the idea of investing in long-term fixed income investments, including bonds, public provident fund (PPF) and Sukanya Samriddhi Yojana (SSY).
However, not many really understand that one should be more focussed on the residual maturity of a bond and not the tenure of the bond. Residual maturity is the time pending for the bond’s maturity. If the bond is issued for 10 years, then after two years from issuance, the residual maturity is eight years.
Ask an average investor about investing in tax-free bonds issued by central government backed public sector undertakings (PSUs) some years ago, and the first thing you hear is long term – 10,15 or 20 years. But they forget that these bonds were issued in the year 2013. So the residual maturity of some of these bonds would be around five, six or seven years; the number of years remaining for maturity.
These bonds are issued by National Thermal Power Corporation, Rural Electrification Corporation, Housing and Urban Development Corporation, Jawaharlal Nehru Port Trust, Indian Railway Finance Corporation. Given the prevailing tax-free yield in the range of 6-7%, these bonds could be considered by individuals who are looking to invest for five years and want to earn tax-free returns.
PPF and SSY are also considered as long-term investments. Tenure of PPF is 15 years and SSY money can be withdrawn after the girl child attains the age of 18 and 21. But there is a way to take advantage of these options. For example, in the early years of career, one may find it difficult to save big money. But still an account can be opened in PPF. In the initial years, one may start with token investments. As one grows in his/her career, he can increase his investments.
In the last few years, you can invest larger sums in PPF account and can be used as 3-year, 4-year or 5-year instrument that offers tax-free returns with sovereign guarantee.
Same can be done with SSY and EPF. In case of EPF, individuals nearing their retirement can consider an increase in their voluntary contribution to EPF up to 100% of basic salary. We are not suggesting that you invest your entire (basic) salary in voluntary EPF as money is locked in till you retire, but a little bit extra on your part can help boost the retirement corpus without taking extra risk. Besides, you need to keep an eye on your asset allocation as well.
In an ideal scenario, one should be taking full advantage of the investment options from day one, however, for most of the individuals it is not possible in real world to do so given the financial constraints. One can make the most of these investment options if he keeps track of the residual maturity.