Investing money in a single bond will cost a lot, bond ladder strategy will save you from loss

When you put all your money in just one bond, you are in a huge trap. The disadvantage is that you are locked into a single interest rate. Your money remains stuck until the bond matures. Meanwhile, if interest prices change in the market, the entire risk is yours. A straightforward way to avoid this huge loss and invest wisely is the ‘Bond Ladder Strategy’.

Bond laddering simply means creating a ladder for your money. In this trick, instead of locking all your money in one place, you divide it into several bonds that mature at different times. For example, you divided your money into five parts and invested them in 1 year, 2 year, 3 year, 4 year and 5 year bonds. Here each bond is a rung of this ladder. You will get your money back as soon as 1 year is over and the tenure of the first bond is over. Now if you want, you can withdraw that money or reinvest it in a new bond for future.

Also read: Is the economy heading towards recession? ‘Bond yield curve’ already gives signals

How is protection done?

The biggest advantage of this method is that you do not have to worry about the increase or decrease in interest prices. Interest rates always change in the market. If you invest all the money together and later the interest rates increase, you will not get the benefit of the increased rates. Whereas if the rates fall then you will be stuck with low profits. With bond laddering, only a small portion of your money is linked to the interest rate at any one time, keeping all your money safe and leaving you with opportunities.

By adopting this method you get four big benefits. The first advantage is that the money keeps coming back to you every few days. With this, your pocket is never empty and there is always cash. The second advantage is that you get full opportunity for the interest rate to increase. If interest rates increase in the market, you can invest the money you get back in new and more profitable bonds.

The third advantage is that in times of trouble, money comes into hand immediately. Because you get cash every year or every few months, you do not have to sell your entire investment after suffering a loss in case of any sudden need. The fourth and biggest benefit is mental peace. No matter how much the market goes up and down, you do not have any tension and your money keeps growing easily.

How to divide money into different parts?

If you have full Rs 5,00,000. You can invest it for different periods of time as per your need. For immediate needs, put Rs 1,00,000 in a 1-year bond. For short-term needs, invest Rs 1,50,000 in a 2-year bond. For the long term, invest the remaining Rs 2,50,000 in 3 to 5 year bonds. As soon as your first 1-year bond matures, you can reinvest the money in the longest tenure bond. In this way this ladder will continue to move forward.

Who is this method suitable for?

This method is not just for retired people but it is useful for all types of investors. This is perfect for seniors who need a fixed income every month or year. It is also best for those who do not want to take any risk or are gradually adding money for some big project. Apart from this, new and young investors who want to develop the habit of saving, parents who want to save money for their children’s education and people who wait for the right time of the market can also benefit from this.

Know these four dangers also

This method definitely reduces the risk but does not eliminate it completely. It is important to keep these four things in mind while investing. The first danger is credit risk i.e. the company whose bond you have bought may go bankrupt. Therefore, do not invest all the money in one place. The second is reinvestment risk, which means that when your bond matures, the interest rate in the market may be less than the price. The third threat is that of inflation because sometimes the profits of bonds fall short in the face of rising inflation. Fourth is liquidity risk, that is, it is difficult to sell some bonds suddenly before time. To avoid all this, always choose reliable bonds.

Also read: Foreign investors are selling shares, yet how is the Indian market holding up?

6 easy steps to make a ladder

• First of all decide how much money you have to invest.
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• Select how many years you want to create the ladder, such as 1 year, 3 years or 5 years.
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• Visit an online platform and choose bonds with different maturities.
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• To reduce risk, distribute money among different companies or government bonds.
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• Keep your money in equal parts or divide it more or less as per your need.
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• Whenever a bond matures and you get the money back, reinvest it in the longest term bond or use it as needed.