Imagine reaching retirement with a bond portfolio that works like a staircase. One bond matures this year, another next year, and another the year after, giving you access to money at different points instead of having to unlock the entire investment at once. This is the idea behind a bond ladder: spreading maturities across time so your money becomes available at different points of time, while giving you opportunities to reinvest as interest rates change.
Time diversification
The strategy is essentially a form of time diversification. Instead of putting a large sum into bonds that all mature together, the investor spreads the maturities over several years.
When one bond matures, its principal can be used for spending or moved into a new bond at the far end of the ladder. This creates a rolling cycle of maturities and reduces the need to make a single bet on where interest rates will be when the entire portfolio needs to be renewed.
Let’s say, for instance, you have ₹7 lakh to allocate for bond investments. Rather than investing the entire amount into a single bond in one go, you could time-diversify it among several bonds with staggered maturity periods, say with maturities of one, two, three, four, five years and so on. When the first bond matures, you get that money back. You can use it if required or reinvest it in a long-term bond. The interest you receive along the way is separate from this maturity amount.
