An increasing number of individuals are opting to park their hard-earned money into low-risk instruments such as bonds and fixed deposits (FDs). This phenomenon is especially evident after a series of repo rate hikes made by the Reserve Bank of India (RBI), which was done to tame the ever-surging inflation.
It should be noted that FD interest rates are directly proportional to the central bank’s repo rates. Hence, over the past year, interest offerings of fixed deposits were found to have escalated by about 0.35% to 2.75%. While this comes as a piece of good news for individuals who prefer to multiply their savings via FDs, there exists another sneaky way for you to boost your returns even more!
Commonly called ‘FD laddering’, the method allows you to hit two birds with one stone: your idle assets’ liquidity remains uncompromised and you get to build a greater financial corpus, too! Want to know more about this smart savings strategy? Then, keep reading.
What Is FD Laddering?
As you might have already inferred by reading its name, FD laddering involves creating a ladder out of multiple FD bookings. How is it done? You start off by parking your money into multiple FDs instead of a single one. All of these should ideally have shorter tenors. Most individuals prefer going for those FDs that conclude their term within 1 to 5 years, as that gives them the maximum liberty to leverage and take advantage of appreciating interest rates.
To illustrate, say you have accrued about ₹30 Lakhs over the years and now want to park the funds in a lucrative FD scheme. The first step will be to split your corpus into multiple portions. Now, you’ll have to pick three fixed deposit plans, preferably those that come with higher interest rates and lower tenors.
Supposing that you divided your idle funds into 3 mini-corpuses of ₹10 Lakhs each and parked them into 3 FD schemes having tenors of 1 year, 2 years, and 3 years. After one year, your first FD scheme will conclude its term and a payout inclusive of the predetermined interest amount will be made under your name.
During this period, if the central bank increased its repo rates, which, in turn, led to boosted FD interest offerings, then you’ll be free to use your fresh payout to book another FD. This time around, the interest offerings will be much more attractive than before, entitling you to obtain even greater returns.
Then, fast-forward to the next year, another one of your FDs will conclude its tenor, thereby releasing another portion of funds. Taking the payout, you can again park the funds into another fixed deposit plan, at an even higher rate of interest.
This scenario can be contrasted with one involving a single FD having a tenor of, let’s say, 5 years. In this case, your returns wouldn’t have been as high, as the interest rate of the scheme remains frozen during the entire period. Moreover, as the money is locked in for 5 years, your assets’ liquidity will be compromised as well.
You can continue to deploy this strategy for a stretched period of time to effectively compound your assets in a risk-free manner!
FD Laddering: Benefits
To sum up and elaborate some more, the perks that come hand-in-hand with FD laddering include:
Enhanced liquidity: With each fixed deposit scheme maturing after a short period of time, the liquidity of your assets is boosted significantly.
Increased security: When booking multiple FDs, you have the option of opting for different financial institutions instead of trusting one organisation with all of your savings. This helps you further slash external risks.
Alternate income: FD laddering is an especially useful strategy for retired individuals, as the periodic payouts can serve as a consistent source of revenue. Also, when this method is paired with the special interest rates offered exclusively to senior citizens, it can help the elderly in mitigating financial adversities that come as a package deal with retirement, too.
Flexibility: This method enables you to modify your FD bookings in accordance with your changing financial goals and liquidity requirements, along with the evolving interest trends.
Optimized returns: By booking different fixed deposit schemes with different providers, you can pick the plans that offer the highest interest rates and make the switch whenever there are external changes with respect to interest offerings.
Surging fixed deposit interest rates translate to higher returns, provided you book the plan at the right time. Since predicting inflation trends and repo rate hikes in an accurate manner is a herculean task in and of itself, going for FD laddering can be your next best bet. By optimizing your returns and building a reliable emergency corpus, this strategy can help you prepare for all unexpected mishaps that may come your way, at any given point in time.