Most people buy bonds one at a time, picking whichever has the best rate that week. A better approach is to start with your goal and choose a bond strategy that fits it. Here are the main bond strategies and the goals each one suits.
Start With Three Questions
Before choosing any bond strategy, answer these:
- When do I need the money? One fixed date, regularly over time, or not for years?
- Do I need income along the way? Or can interest build up until maturity?
- How much risk can this money take? Is a delay or loss acceptable, or would it derail the goal?
Strategy 1: The Bullet, for a Single Target Date
If you need a set amount on a known date, such as school fees or a wedding in three years, buy bonds that all mature just before that date. Cumulative bonds work well here, since interest compounds until maturity.
Best for: one-time goals with a fixed deadline.
Watch out for: buying a maturity that lands after your deadline. Many bonds trade thinly, so selling early can mean taking a lower price.
Strategy 2: The Ladder, for Flexibility and Rate Protection
A bond ladder spreads your money across bonds maturing at different points, say 1, 2, 3 and 4 years. Each year something matures, which gives you access to cash and a chance to reinvest at the rates available then.
Best for: emergency reserves beyond your FD, or investors who don’t want to bet on where interest rates go.
Watch out for: letting maturities bunch together over time. Reinvest each rung at the far end.
Strategy 3: The Income Strategy, for Regular Cash Flow
If you need money every month, such as retirees or anyone supplementing their salary, choose bonds with monthly or quarterly payouts and spread them across several issuers so payments arrive steadily.
Best for: retirement income, rent replacement, or fixed monthly expenses.
Watch out for: relying on one issuer. If it defaults, a large part of your income stops.
Strategy 4: The Barbell, for Balancing Liquidity and Yield
A barbell puts part of your money in very short-term bonds and part in longer ones, with little in between. The short end gives liquidity; the long end locks in a rate for longer.
Best for: investors comfortable with some price movement who want both access and yield.
Watch out for: the long end. If rates rise, they lose value on paper.
Rules That Apply to Every Bond Strategy
- Rating first. Stick to AAA and AA from CRISIL, ICRA or CARE for goals that can’t afford a setback. Ratings are a signal, not a guarantee.
- Check security. For secured bonds, look at the security cover ratio, not just the label.
- Compare yield to maturity, not the headline coupon.
- Think post-tax. Interest is taxed at your slab rate.
- Diversify across issuers, three or four at minimum.
A Worked Example
Say you have ₹6 lakh: ₹3 lakh for a home renovation in two years, and ₹3 lakh you’d like to produce income. A sensible bond strategy:
- Bullet: ₹3 lakh across two AAA/AA bonds maturing in about 22-24 months
- Income: ₹3 lakh across three AAA/AA monthly-payout bonds
At an illustrative 8.5%, the income portion pays roughly ₹2,100 a month before tax.
Platforms like GoldenPi let you filter bonds by rating, tenure and payout frequency, which makes it easier to build each piece. A list of highly rated bonds is a good starting point.
Conclusion
Use a bullet for fixed dates, a ladder for flexibility, an income strategy for cash flow, and a barbell if you want both liquidity and yield. Match the strategy to the goal first, and choosing individual bonds becomes far simpler.
This article is for general informational purposes only and should not be treated as investment advice. Please assess your own risk appetite before investing.