okay I have Rs 2 lakh ready to invest in bonds. my instinct is to just find the best bond I can and put the whole Rs 2 lakh in it. but I’ve also read about diversification. is diversifying across 20 bonds of Rs 10,000 each actually useful at Rs 2 lakh or is it overkill?
but if I’m buying AAA rated bonds from large institutions the chance of default is near zero right. so isn’t diversification just reducing yield for no real benefit
For genuinely AAA rated bonds from government PSUs like REC or PFC the default risk is indeed very low. But diversification still matters for a different reason: concentration risk is not just about default. It is also about liquidity, reinvestment timing, and the possibility of a rating downgrade even without default. Spreading across two or three issuers of similar quality and two or three maturities costs you nothing in yield if you find similarly rated bonds, and it means you are not entirely dependent on one issuer’s operational reliability for your coupon payments.
what would you actually do with Rs 2 lakh. give a concrete allocation
a practical split for Rs 2 lakh starting out: Rs 80,000 in a 2 year AAA PSU bond like REC or IRFC, Rs 80,000 in a 3 year AA secured NCD from a large NBFC, and Rs 40,000 in a 91-day T-bill rolled every quarter for liquidity. that gives you sovereign exposure, corporate exposure, yield pickup, and a liquid rung. you are not over-diversifying across 20 names but you are also not betting everything on one issuer. as the corpus grows you add more rungs.
this is genuinely helpful. so at Rs 2 lakh the goal is not maximum diversification but sensible diversification. two or three issuers across different ratings and maturities is enough to start.
That is exactly it. Spreading across 20 issuers with Rs 10,000 each would also mean a lot of small positions that are administratively tedious to track. Two to four meaningful positions make more sense at this stage and give you most of the diversification benefit you actually need.