Debt was supposed to be easy. Only, the recent volatility in the debt market makes investing in the stockmarket look like a high school picnic. How low will interest rates go? How long will they stay low? What do we pick, short-term debt instruments, or long-term ones? No one quite knows, although investment advisors manage some intelligent guesses. Let's give you a tip: we spoke to the managers of some debt funds (actually, the best-performing ones), and they have no idea how interest rates will move. And let's give you some hope: what's in store for you, in this article, is a strategy-one that will earn you modest returns-for debt investing.

First, the basics: investing in debt is all about taking a call on how interest rates will move. Smart investors spread their investments over varying maturities--and you probably do that too. Our recommendation: do so, but in a structured fashion. This science of spreading your money over debt instruments of varying maturities even comes with a fancy tag: laddering.

Laddering is simplicity itself. Step 1: Pick an investment horizon, say five years. Step 2: Buy debt with one, two, three, four, and five-year maturity periods. Step 3: At the end of the first year, invest proceeds in five-year debt at prevailing rates. Step 4: Repeat ad infinitum or till you are sick of the whole process. The benefits: liquidity and a stable return on investment over the long term.

Ladderising can ensure that you earn returns that are higher than you would have had you picked a short-term portfolio. It does mean your returns will be lower than those on a long-term portfolio, but your risks are appreciably lower as well. If interest rates fall, your fresh investments will be at a lower rate of interest, but your past investments will earn higher returns. And should interest rates rise, your new investments will be at higher rates. Either way, your average return over the long-term will move towards the market rate of return. "By spreading your maturities, you'll be protected against interest rate fluctuations," explains Rajiv Bajaj, Managing Director, Bajaj Capital. "Your income stream also smooths out over the investment period."

There's another benefit to laddering: it minimises the role of the heart in making an investment decision (as long as you keep the ladder going, that is). If you have a strong notion which way interest rates are headed, you can actually work that into the structure of your own personal ladder. For instance, if you think they will dip, you may need to build a ladder with a long tenure to lock into existing rates. And if you think rates have been kept artificially low, keep the ladder small by investing in debt that matures every quarter. Increase the length of the ladder (you do this by investing in debt with a longer maturity period) as the interest rate moves up. The only caveat: your ladder should match your cash flow needs.

"Debt funds are far more diversified in nature," says Binay Chandgotia, Manager, idbi Principal Mutual Fund, who recommends a mix of liquid funds 91-3 month maturity), short-term debt funds (2-6 months), income funds (1-4 years), and gilt funds (2-4 years). "Retail investors can find it difficult to construct a ladder given the complex risk-return equations."

You'd probably like us to end by giving you a tip on how your ladder should look right now. Most experts believe there is a short-term downward pressure on interest rates, but that these will increase as the economy grows. Keep that ladder short for now.