Building a fixed income allocation

Eleven chapters of mechanism. Here is the order you would actually use them in.

Start with the dates, not the instruments

The question is never "what is the best debt fund". It is "what is this money for, and when do I need it".

Sort every rupee by date:

When you need it	What it is for	Where it belongs
Any day, without warning	Emergency fund	Cash and the shortest, highest quality instruments
Inside 1–3 years	A known commitment	Maturity matched to the date; no credit risk worth taking
3–10 years	A planned goal	Duration matched to the horizon; credit only if paid and diversified
Beyond 10 years	Long-term wealth	Mostly not fixed income at all — chapter 11 is why

That table does most of the work. Almost every bad fixed income outcome an individual suffers is a date in one row held in an instrument from another.

Match the maturity to the date

The single most valuable idea in the subject, from chapter 3.

A bond held to maturity pays what it promised. The price swings in between are real but you never transact at them. So if you know the date, buying something that matures near it removes interest rate risk almost entirely — not by forecasting, but by never needing to sell.

For a fund, chapter 6's version: keep the portfolio's duration near your horizon. Short money, short duration.

The failure this prevents is specific and common: holding a long duration fund for money needed next year, watching rates rise, and selling at a loss that would have been nothing at all had the maturity matched.

Build a ladder when the dates are spread

If you need money at several points, buy instruments maturing at each — a ladder.

Say you need money each year for five years. Buy bonds maturing in one, two, three, four and five years. Each year one matures and hands you cash exactly when you need it. If you do not need it, you reinvest at whatever rates then exist.

Three things a ladder quietly does well.

It removes the timing decision. You are not trying to guess whether to lend long now. You lend across the curve and let the dates do the work.

It averages reinvestment. Some rungs roll over into high rates and some into low. Chapter 5's reinvestment risk is diversified across time rather than concentrated in one decision.

It makes the plan legible. You can see what arrives when, which is the point of fixed income.

Decide credit risk deliberately

Chapter 7 gave the rule, chapter 2 gave the warning. Three questions before accepting a spread:

Am I paid enough? The spread over a government security of the same maturity is the compensation. Is it worth it for this issuer?

Am I diversified? One default removes years of extra yield. Through a fund holding dozens of issuers, credit risk is a portfolio position. Through three bonds, it is a bet.

Does this money allow it at all? For an emergency fund or a known commitment, the answer is no, however attractive the spread. A rating does not measure liquidity risk or secondary market loss, and those are precisely what bite when you need money quickly.

The default position for most people, most of the time: take duration risk deliberately and credit risk sparingly. Duration is paid by a visible curve you can read, and it reverses. Credit can be permanent.

How much fixed income at all

Not a question with a universal answer, and three things shape it.

Your horizon. Money you genuinely will not touch for decades has a weak case for fixed income, because chapter 11's real return after tax is close to nothing over long periods.

What you cannot afford to lose. Everything with a date and a consequence belongs here, whatever your age or risk appetite.

Whether you will actually hold your equities. This is the underrated one. If a meaningful bond allocation is what stops you selling equities in a 40% fall, it has earned its place several times over — chapter 9 of the equity subject is why. Fixed income's contribution to a portfolio is partly the equity mistakes it prevents.

The checklist

1. What is this money for, and when? Everything follows.
2. Does its maturity or duration match that date? Chapters 3 and 6.
3. Whose promise am I holding? Chapters 2 and 7.
4. What is the yield to maturity at the price I pay? Chapter 5, not the coupon.
5. Am I being paid for duration right now? Chapter 9's curve.
6. What is left after tax and inflation? Chapters 10 and 11.
7. Direct or through a fund, and why? Chapters 4 and 8.
8. If I take credit risk, am I diversified? Chapter 7.

The point

Sort money by the date you need it, match maturity or duration to that date, and ladder when the dates are spread. Take duration risk deliberately and credit risk sparingly, because duration is paid by a curve you can read and reverses, while credit can be permanent. Then check what is left after tax and inflation.