Inflation Index bond is a good option to invest in for a pensioner. But a pensioner, if he can, should invest some portion of his money in mutual funds, equities, fixed deposits(for liquidity purpose). In other words, he should keep the portfolio balanced.

Inflation-indexed bonds (also known as inflation-linked bonds or colloquially as linkers) are bonds where the principal is indexed to inflation.

They are thus designed to cut out the inflation risk of an investment.

As of 2008, government-issued inflation-linked bonds comprise over $1.5 trillion of the international debt market. The inflation-linked market primarily consists of sovereign bonds, with privately issued inflation-linked bonds constituting a small portion of the market.

The real yield of any bond is the annualized growth rate, less the rate of inflation over the same period. This calculation is often difficult in principle in the case of a nominal bond, because the yields of such a bond are specified for future periods in nominal terms, while the inflation over the period is an unknown rate at the time of the calculation. However, in the case of inflation-indexed bonds such as TIPS, the bond yield is specified as a rate in excess of inflation, so the real yield can be easily calculated using a standard bond calculation formula

http://en.wikipedia.org/wiki/Inflation-i... .