Investment Ladder for efficient growth of your wealth
It is an investment strategy that provide you way to balance the risk and returns in your portfolio. This technique is provided by financial planners to most of the investor. It helps you in following aspects:
For example: You want to invest Rs. 30,000 for the period of 5 years with interest rate of 7 %. In this case, you cannot avoid the risk, if interest rate dropped in future year or you also can not take advantage if interest rate is increased. So, using laddering strategy, you should invest three bonds of Rs. 10,000 in three different plans. First 10,000 for 5 years with 6 % rate, second Rs. 10,000 in another plan for 6 years with 7 % rate and third Rs.10,000 in another plan for 7 years with 8 percent interest rate.
After five years, first bond will get matured, and you can re-invest the same in profitable bond that time for again 5 year plan. In sixth year, you can reinvest second bond for five year. Similar ladder can be used to grow your wealth.
Different bonds from different companies like SBI,Tata Capital,Shriram Transport Finance and L&T Finance, National Saving Scheme(NSC) etc.
In any type of saving like fixed deposits, interest rates are always volatile. Nobody is sure about whether interest rate will rise or fall in future. If you are risk averse, you should optimize balance the risk within different period of time. So, this will also provide maximum benefit on your return.
Matured money can be renewed in other different plan in future. You won’t stick to single plan. Laddering provide you optimal return with safety of capital and liquidity.
Why Laddering is effective?
- It is very difficult to predict interest rate in future. That’s why, laddering is advised by advisers.
- Ladder can be created with mixture of different plans like fixed deposits, company deposits, fixed maturity plans and retail bonds.
- Length of ladder can be decided depending upon your capability and risk aversion.
- Optimize the return on your fixed income portfolio.
“One popular way that investors can help to balance risk and return in a bond portfolio is to use a technique called laddering. Building a laddered portfolio means that you buy a collection of bonds with different maturities spread out over your investment time frame. For instance, in a ten-year laddered portfolio, you might purchase bonds that mature in 1, 2, 3, 4, 5, 6, 7, 8, 9, and 10 years. When the first bond matures in a year, you’d reinvest in a bond that matures in ten years, thereby preserving the ladder (and so on for each year). The rationale behind laddering isn’t complicated. When you buy bonds with short-term maturities, you have a high degree of stability — but because these bonds are not very sensitive to changing interest rates, you have to accept a lower yield. When you buy bonds with long-term maturities, you can receive a higher yield, but you must also accept the risk that the prices of the bonds might change. With a laddered portfolio, you would realize greater returns than from holding only short-term bonds, but with lower risk than holding only long-term bonds. By spreading out the maturities of your portfolio, you get protection from interest rate changes. If rates fell by the time you need to reinvest, you’d have to buy a bond with a lower return, but the rest of your portfolio would be generating above-market returns. If rates increased, you might receive a below-market return on your portfolio, but you could start to take care of that the next time one of your laddered bonds matures.“