Fixed Deposit (FD) is one of the most popular and safe investment options in India. Banks give returns on FD as per the fixed interest and it cannot be changed during the entire tenure.
There is no impact of market fluctuations on this amount. That means those who invest in it get guaranteed returns. But many times it happens that we withdraw money from the FD or ‘break’ the FD due to a sudden emergency which affects the return.
Some penalty also has to be paid for breaking the FD prematurely. In such a situation, we can take the help of FD laddering technique through which maximum returns can be gained on an FD, that too without breaking it.
We all understand the importance of smart financial planning to secure our future and achieve our dreams.
One such approach that has recently gained popularity is FD laddering. As the name suggests, FD laddering is an investment strategy in which your investment is divided into multiple FD schemes with different maturity dates.
In simple words, it is like building a tower, in which each deposit amount matures at a different time.
Anupama Bhargava, a Certified Financial Planner and Partner at Beekay Taxation & Investment LLP said, "Rather than making one single deposit for a long tenure to get the best interest rates, laddering your fixed deposits to get the maximum advantage out of your investments is an effective strategy, that not only helps maintain easy liquidity but also makes funds available in case of potentially higher interest rates in the future."
"Laddering fixed deposits is nothing but making many small deposits for varying tenures, ensuring maturity spreads across periods rather than being at one time. Additional benefits accrue if one also diversifies across banks that can ensure security as well as an opportunity to access different interest rates on offer by different banks. To sum it up, laddering your deposits has many potential benefits like easy liquidity, diversification of risk, opportunity to earn higher returns and manage your taxes too," Bhargava added.
FD laddering is a technique in which investors have to open multiple FD accounts, which have different maturity dates.
For example, if want to invest Rs 5 lakh in a fixed deposit account, then first divide it into 5 different parts. Now deposit Rs 1 lakh each in FD schemes with maturity of 1 year, 2 years, 3 years, 4 years and 5 years.
With this, you will get money from time to time, which you can spend as per your need.Its advantage is that if you need money in between, you will not have to break your FD.
On the other hand, if the money is not needed, then as the FD of different tenures matures, it can be locked again in FDs of different maturity periods.
In such a situation, you will have an increased serial number of FD in the long term and a good amount of funds will be ready for you.
Another advantage is to assess the returns on FD; are they increasing? After completion of maturity, you will have the option to deposit it again in the FD of the bank giving higher interest.
FD laddering gives you a high-interest earning and free's you from the tension of increasing or decreasing interest rates.
You get liquidity without loss which offers you flexibility, risk management, and tax saving while meeting your investment goals in the long run. It makes sure you get returns periodically.
Another big advantage of FD laddering is that as your FD matures, you will get returns every year i.e. 1 year, 2 years, 3 years, 4 years and 5 years.
If you need money after maturity, you can use it and then put the remaining money in FD.
Keep these things in mind before laddering FD
Need for liquidity
Deposit where interest rate is higher
Check tax rule
Check penalty on early withdrawal
