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FDs and laddering them for greater benefits


FDs and laddering them for greater benefits

FDs or Fixed Deposits are amongst the safest and most secure investment options for Indian citizens. FDs do not have any element of risk in a manner of speaking and offer assured returns that help in meeting long-term wealth creation objectives. The rates of interest are higher in the current scenario and FDs are often preferred by both short and long term investors alike. FDs have become only more popular with several consumers shying away from investing in avenues such as mutual funds and stocks on account of lower risk appetite and awareness about the same even though they promise comparatively higher returns than FDs.

FDs are available at almost every Indian bank and NBFC. The rate of interest that you are getting on your Fixed Deposit from your NBFC or bank is the actual return that can be garnered from the account. You will have to invest some time and energy into working out the combinations with regard to the suitable deposit amount and tenor that meets your requirements along with other aspects like payout frequency with a bid towards maximization of returns. However, even within the FDs, there are ways you can improve your overall take-away. Sounds surprising right? Yes, you can always have a little tweak in place for getting better returns while making sure that there is ample liquidity for emergencies. People are often concerned about FDs offering lower returns upon premature withdrawals and this concern can be addressed as well. You can always save up on assured returns garnered from several accounts, each of them with varying periods of maturity. This is the principle of laddering deposits. Laddering FDs is what you need to do in case of covering risks related to re-investment while garnering improved returns at the same time.

FDs help you accomplish goals for the mid and short term, particularly if you are placed in the low income tax bracket. FDs will also be the best option for those with lower appetite for risk as mentioned even though they may not be surpassing inflation totally. Suppose you make an investment in FDs which have been issued by public or private sector banks or India Post. This investment will have almost zero credit risks. However, liquidity requirements make for an aspect which you cannot ignore by all means. This can be taken care of by laddering.

How laddering FDs will be helpful

Laddering basically means the spreading out of your FDs throughout a particular duration. For instance, suppose you have Rs. 10 lakh that you can invest in FDs with. You can spread it out into 4-5 FDs with maturity periods spread over 1, 3 and 5 years if your financial position and goals enable you to do this. With this strategy in place across regular periods of time, you will have FDs maturing at periodic intervals. This will help you address liquidity aspects while earning better returns at the same time! Even if you require money in the interim duration, pre-mature withdrawals can be chosen only till the amount that you basically need. Suppose you require Rs. 1 lakh for any medical emergency expenditure. If you have an FD of Rs. 5 lakh, you will have to pay penal interest for the entire amount.

However, if you have 2-3 FDs for this amount with some being Rs. 1 lakh, you can break only a couple of them and the remainder will keep earning you interest at the same rate agreed upon at the time of the agreement. Laddering is also a good move with regard to helping you cover re-investment linked risks. This indicates risks linked to lower returns that may be available during the time of reinvestment of money. In case you invest all your funds together, you may have to get your FD done at a lower rate of interest in case the market rates are on the lower side and your overall cash flows may come down as a result.

You have to keep investing periodically in multiple FDs with regard to building a ladder. This will help you cover re-investment related risks anytime while you will not be deprived of liquidity since one or the other FD will keep maturing periodically while in case of emergencies, you will not have to break any FD of yours. Laddering enables higher returns without a doubt since you spread the investment into several FD accounts. Laddering also means that you can easily stay ahead of the curve and invest periodically when rates are on the higher side for earning the best returns.

Advantages of laddering FDs in a nutshell

Here’s taking a look at some of the key benefits of laddering FDs that you should know more about:

  • Lowering losses linked to premature withdrawals- Laddering FDs will enable reduction of losses linked to premature withdrawals. With laddering, you can wait it out for better rates of interest. With every step of the ladder maturing, you can also spread out investments in other avenues based on your risk appetite.
  • Liquidity Factors- You will always have liquidity at periodic intervals since one or the other FD will keep maturing at gaps. You can make sure that you have liquidity every 6 months or even once a year by laddering deposits suitably.
  • Good returns- Laddering will help you steadily ensure consistent returns and is an ideal option for senior citizens who have lump sum funds to invest in FDs since they will get good returns on a quarterly, monthly or yearly basis. Laddering may not help you get good returns immediately but over the long haul, it can be a better option to earn higher returns as compared to returns from a single FD for a lump sum amount.

Retirees and senior citizens who depend on income interest for meeting regular expenses should consider laddering FDs. This is also a good option for those who are unsure about long-term FD investments and desire more flexibility with regard to reinvestment of money. Those with short-term objectives such as car purchases or holidays can also take advantage of laddering. Laddering also helps you prevent any maturation of investments at the lowest interest rate in a cycle.


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