Banks Raise FD Rates: How To Maximise Your Returns And What It Means For Your Savings

Fixed Deposit laddering allows for strategic management of fixed deposits that helps enhance liquidity and maximises returns

Laddering involves diversifying your FD investment into multiple deposits with different maturity tenures.

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Fixed deposit rates have recently been trending higher after many leading banks announced hikes in their Fixed Deposits (FDs) interest rates. This shift is a positive signal for many investors who prefer investing in assets free of risk to avoid volatility. Many senior citizens, especially pensioners, prefer to park their money in FDs to ensure a stable income.

Speaking of FD returns, there is a strategy called FD laddering that can help you earn higher returns on your investment.  Let's find out how this strategy works and the many ways it can benefit you on your financial journey.

What is FD Laddering Strategy?

FD laddering allows for strategic management of fixed deposits that helps enhance liquidity and maximises returns. Instead of investing a lump sum in a single FD, investors can divide their FD investment into several smaller deposits with different maturity dates. This creates a 'ladder' of FDs that mature at regular intervals, allowing you to access a portion of your funds periodically while still earning interest on longer-term investments.

How Does It Work?

Laddering involves diversifying your FD investment into multiple deposits with different maturity tenures. You can open FDs with varying tenures from 1 to 5 years. This kind of diversification means that a portion of your investment will mature every year, giving you periodic access to your funds. You can either withdraw your funds or re-invest them when the FD matures.  

For example, you open an FD worth Rs 1 lakh for a tenor of one year at the interest rate of 5% and the rate of inflation is 6%. In this case, your returns would not be adequate to offset the impact of inflation. With the laddering strategy, however, you can open a series of successive FDs with increasingly higher interest rates over time, say 5%, 7%, and 8%. This strategy would fetch you inflation-beating returns, thereby providing a real growth in your investment.

Benefits of FD Laddering

• Enhanced Liquidity: With FDs maturing at regular intervals, you will have access to funds periodically, which can be useful for meeting unexpected expenses or taking advantage of investment opportunities.
• Higher Interest Rate: If rates rise, you can reinvest a matured FD at higher rates. Also, if rates fall, only a portion of your investment remains locked in at the lower rate, with the rest benefiting from previously higher rates.
  Regular Income Stream: The staggered maturity of FDs ensures a predictable income stream. This can be particularly beneficial for those seeking regular income without taking on significant investment risk.
• Easy to Manage: FD laddering is a simple strategy that does not require regular monitoring. Once set up, it runs on autopilot, providing both peace of mind and financial stability.

What to Keep in Mind

• Interest Rates: Keep an eye on prevailing interest rates. While FD laddering helps mitigate interest rate risk, being aware of the rate environment can will help you make informed reinvestment decisions when FDs mature.
• Tax Implications: Interest earned on FDs is taxable. Depending on your tax bracket, this could impact your overall returns. Consult with a tax professional to understand the tax implications and plan your investment accordingly.
• Withdrawal Penalties: Most banks impose penalties for early withdrawal of FDs. Ensure you have sufficient liquidity beside your FD investments to avoid premature withdrawals, which could erode your returns.

FD laddering is a smart way to earn higher on your FD investment. Whether you are a risk-averse investor looking for steady returns or someone seeking to diversify your investment portfolio, FD laddering offers an effective way to meet your financial goals.

The author is the AGM, Bankbazaar.com Communication. This article has been published as part of a special arrangement with BankBazaar.