Fixed deposits (FDs) are a popular investment instrument as they give fixed returns on your invested capital for a definite period. Hence, FD laddering is a great strategy to maximise returns from FDs.
“FD laddering is a time diversification method to optimise interest accumulation while maintaining liquidity. In this, you have to split your FD into smaller chunks with different tenures to maturity instead of one large FD,” says Chenthil Iyer, founder and chief strategist, Horus Financial Consultants.
For example, if you want to put Rs 10 lakh in an FD for five years, you may put Rs 2 lakh each for one, two, three, four, and five years, respectively, with auto renewal for similar terms. This way, the reinvestment will happen at the prevailing interest rates, which you can take advantage of if you expect the interest rates to increase.
Benefits of FD laddering: FD laddering has several advantages. With FDs maturing each year, you can use or reinvest the maturity proceeds every year. You can also decide on the amount to suit your needs. While you can invest an equal sum across different maturity periods, you can use a bigger some for certain periods.
“Since predicting the movement of interest rates is difficult, it is better that you participate in all tenures and rates instead of locking the money up at a single rate of interest for a single tenure,” says Iyer.
FD laddering could work best when the interest rates are expected to rise. You can gain from the rising interest rates by spreading out your investment. When you ladder your FD investments, you also have more liquidity, as you can have money in case you need it for emergencies.
You can also ladder your investments in a five-year FD, which gives you a tax deduction u/s 80C. Each year you may invest some investable surplus into an FD. After five years, you will receive the maturity proceeds of the first FD. Every ensuing year you will receive the proceeds of one FD, and thus you maximise your returns even as you save on taxes.
“Nowadays, since different banks offer different interest rates, you may diversify by choosing the best interest rate for a particular tenure across various banks,” says Iyer.
He says that by doing this, you may enjoy the highest interest rate in each tenure. This will also help you to enjoy credit insurance cover of up to Rs 5 lakh each in every bank, in case you have a larger amount to be invested.