Fixed Deposits (FDs) have been a popular instrument of investment for so long. Even today, when young investors are moving towards mutual funds and equity options, FDs make an integral part of a diversified and balanced portfolio. Fixed Deposits have once again come to light ever since the central bank increased the repo rate and inflation came down. Now, FDs are offering inflation-beating returns.
If you’re looking to invest in fixed deposits, try this time with the laddering method. Wait, what is this? Don’t worry, we’ve got you. In this blog, we will discuss all about FD laddering and its benefits. So, keep scrolling and know how it will improve your investment.
What is FD Laddering?
FD laddering is a strategy where you invest your money in multiple fixed deposits with different tenures. Instead of putting all your savings into a single FD, you spread it across several FDs. These FDs mature at different times, creating a ladder-like structure.
Why choose FD Laddering?
1. Enhanced Liquidity: With FD laddering, you have access to a portion of your savings at regular intervals. As each FD matures, you can decide whether to reinvest it or use the money as needed. This provides more liquidity compared to a single, long-term FD.
2. Interest Rate Opportunities: Interest rates on FDs can vary, and they change over time. FD laddering allows you to take advantage of higher interest rates when they become available. You can reinvest each matured FD at the prevailing, potentially higher, interest rate.
3. Mitigating Interest Rate Risk: If you put all your money into a long-term FD and interest rates drop significantly, you might miss out on better opportunities. FD laddering helps you minimize this risk by allowing you to reinvest part of your savings at shorter intervals.
How to Start FD Laddering?
Follow these steps to begin FD laddering:
1. Determine Your Financial Goals: Decide how much money you want to save and for what purpose. This will help you set the total amount you’ll allocate to FD laddering.
2. Select FD Tenures: Choose a range of FD tenures that align with your financial goals and needs. Common options are 3 months, 6 months, 1 year, and so on.
3. Allocate Your Savings: Divide your total savings into equal parts or as per your chosen tenures. For example, if you have ₹100,000 to invest and select three tenures, put ₹33,333 in each FD.
4. Start Laddering: Open FDs with the allocated amounts and different tenures. As each FD matures, decide whether to reinvest it or use the funds as planned.
5. Repeat and Monitor: Keep the laddering process going by reinvesting matured FDs and adjusting the tenures as per your evolving financial goals.
Understand FD laddering with an example
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Let’s illustrate the benefits of FD laddering with a real-life example:
Suppose you start FD laddering with ₹100000 and invest in three FDs with 3-month, 6-month, and 12-month tenures. After three months, your 3-month FD matures, giving you ₹33,333. You can choose to reinvest it or use the money as needed. At the same time, your 6-month and 12-month FDs are still earning interest.
This process continues, creating a cycle of regular maturity dates. Over time, you have the flexibility to adapt to changing financial needs and capture higher interest rates when they arise.
FD laddering is a straightforward and effective way to optimize your savings with fixed deposits. It’s a strategy that empowers you to make the most of your money while keeping things simple and secure. So, consider FD laddering to ladder up your savings game.