Bond laddering: a simple way to manage interest-rate risk

Summary

Bond laddering spreads a lump-sum investment across instruments with different maturities, helping investors manage reinvestment risk while creating a regular flow of cash.

When you invest a large sum in bonds or fixed deposits (FDs), you have to pick a tenure. Lock in for five years and you may miss out if rates rise later. Stay short and you may have to reinvest at lower rates if they fall. Bond laddering offers a simple way to navigate both risks.

In a ladder, you split your money across several bonds or deposits that mature at different times, usually a year or so apart. Each maturity is one "rung" of the ladder.

Say you have ₹10 lakh. You don't put all of it in a five-year bond. Instead, you put ₹2 lakh each into instruments maturing in one, two, three, four and five years. When the one-year rung matures, you reinvest that ₹2 lakh in a new five-year instrument. After the first few years, one part of your money matures every year, and each new rung earns the longer-tenure rate.

Rate protection

The main benefit is that you spread out your reinvestment risk. Because only part of your money comes up for reinvestment each year, you don't have to deploy the whole amount at a bad time.

If rates go up, the maturing rung can be reinvested at the higher rate. If they fall, the rest of your portfolio continues to earn the older, higher rates.