The concept of a bond ladder gets mentioned in every fixed income article. Spread across maturities, reinvest as bonds mature, reduce reinvestment risk. Understood in theory. But what does an actual ladder look like for a retail investor with say Rs 5 lakh? What maturities, what instruments, how many rungs? Disc: looking to build this over the next 6 months.
and what instruments do you use for each rung. like what is appropriate for 1 year vs 4 year
what happens if you need money in month 7 and the nearest maturity is still 5 months away
That is the one limitation of a ladder. You either wait for the next maturity or sell in the secondary market, which may mean accepting a slightly worse price. The practical fix is to keep one rung in a liquid fund rather than a fixed bond, specifically for emergency access. The rest of the ladder stays intact. Some people keep 3 to 6 months of expenses in liquid funds outside the ladder entirely for exactly this reason.
The reinvestment risk benefit is worth understanding explicitly. In 2020 someone who put everything in a 4-year FD locked in low rates for the full period. Someone with a ladder had rungs maturing in 2021, 2022, and 2023 which they could reinvest at progressively better rates as the rate cycle turned. The ladder does not maximise yield at any single point, but it performs consistently across different rate environments.
This is useful. So the practical starting point is: decide on number of rungs, divide corpus equally, match instrument type to tenure length, keep one rung liquid. The ladder manages itself once set up, you just roll the shortest rung into the longest at each maturity. Disc: will share how this goes once I build it.