Fixed Deposits (FDs) are a popular investment avenue that provide stable and guaranteed returns for investors. However, the interest rates offered on FDs tend to be lower compared to other investment options. Using FD laddering strategies not only helps investors maximise returns on their matured FDs but also enhances liquidity, reduces interest rate risk, and provides greater financial flexibility. By staggering the maturities of multiple FDs, investors can take advantage of varying interest rates and ensure a steady inflow of funds.
What is FD laddering?
FD laddering involves investing in multiple fixed deposits with different tenures. This allows investors to benefit from varying interest rates over time. It also results in a regular inflow of funds into your portfolio as each FD matures.
For instance, you could divide your investment corpus into three equal parts. Invest the first part in a one-year FD, the second in a two-year FD, and the third portion in a three-year FD. You can calculate this using a fixed deposit calculator.
Say you have ₹10,000 that you want to invest in FDs as of June 2024. Here is an example of how you can divide your investment corpus into three equal parts and invest them in FDs with varying maturity periods:
Maturity period
Interest rate
Amount
Total interest (Estimated)
Maturity date
1 year
5%
₹3,333.33
₹166.67
June, 2025
2 years
6%
₹3,333.33
₹400.00
June, 2026
3 years
7%
₹3,333.33
₹666.67
June, 2027
Advantages of laddering FDs
Here are some of the major benefits of laddering your fixed deposits.
· Earn higher returns
Laddering allows you to reinvest the matured amount at potentially higher rates in the future. This accumulates greater wealth over long periods of time. When laddering your fixed deposits, opt for issuers like IndusInd Bank that offer attractive interest rates across various tenures. This allows you to lock in higher returns as you reinvest matured amounts over the long term.
Below are some other features of IndusInd Bank Fixed Deposits:
Ø Instant online account opening: Open an FD instantly online by providing your PAN and Aadhaar details along with completing video KYC.
Ø Flexible payout options: Get interest payouts monthly, quarterly, half-yearly, annually, or on maturity as per your needs.
· Improved liquidity
By spreading your investments across multiple FDs with staggered maturity dates, you ensure a regular inflow of funds. This enhances liquidity, providing you with periodic access to cash without breaking a long-term FD and incurring penalties.
· Reduced interest rate risk
Interest rates fluctuate over time. Laddering helps mitigate the risk of locking all your funds at a single interest rate. By having FDs mature at different times, you can benefit from rising rates on new deposits, balancing out periods of lower rates.
Effective FD laddering strategies
Follow these tips to effectively implement FD laddering for optimal gains.
1. Decide investment horizon
First, determine your investment horizon and risk appetite. This will help decide the tenure of FDs in your ladder.
2. Set laddering intervals
Next, set intervals for your FD ladder, usually six months to one year. Shorter intervals allow reinvesting at the latest rates frequently.
3. Allocate corpus
Divide your investment corpus into equal parts for each interval in the ladder. This creates a structured investing approach.
4. Reinvest on maturity
On maturity, reinvest the principal and earned interest into a new FD at prevailing higher rates.
5. Review and reset
Review your FD portfolio periodically and reset intervals according to interest rate outlooks.
Risks of FD laddering
While laddering FDs can optimise returns, a few risks are also involved.
● Interest rate changes: Rate direction may differ from your expectations affecting gains.
● Inflation eroding returns: Inflation may diminish real returns earned over long terms.
● Issuer default risks: Research credit profile and stability of FD issuer to mitigate default risks.
Conclusion
Fixed deposit laddering provides multiple benefits like earning higher cumulative returns and regular liquidity. Follow a methodical approach – set appropriate intervals, allocate corpus, reinvest on maturity, and review periodically. Mitigate risks by diversifying issuers and staying updated on market outlooks. Implement effective laddering alongside other investment strategies for an optimal financial plan
