Tipping Point: What are advantages of laddering? All you need to know

What is laddering?     

Laddering refers to the investment technique of having a collection of fixed-income instruments in your portfolio that mature at different points of time. 

    

What are its advantages?

Imagine that you have a fixed-income portfolio comprising fixed deposits, all of which will mature in three years. Such bunching up of the maturity date can lead to reinvestment risk. Interest rates could be at a low point that year, forcing you to reinvest your money at those low rates. To avoid this, you should ladder your investments. Interest rates tend to move cyclically. By laddering your investments, you can reinvest your fixed-income corpus at different points of time, thereby averaging out the returns you earn.

Laddering is also useful for ensuring that you meet your investment objectives. Invest the money in a laddered manner, so that each instrument in your portfolio matures just when you need it.