Conservative investors rely on Fixed Deposit (FD) investments to consistently grow their wealth over a fixed period. Reinvesting one’s FD returns in another FD account can help investors benefit from higher returns, more liquidity, and better tax planning. A smart way to do this is to adopt the FD laddering strategy.
What is the fixed deposit laddering strategy?
The FD laddering strategy helps FD investors benefit from high FD interest rates and fixed deposit tax benefits. Investors create a “ladder” of FD investments by investing across multiple FDs with varying maturities. This allows investors to reinvest FD maturity proceeds smartly and plan for it well in advance.
For instance, an investor using this strategy would avoid investing the entire amount in one go. Instead, they would allocate their amount across several FDs with staggered maturity periods. Once an FD matures, they can open another FD with the maturity amount at favourable terms or consider other investment options offering higher returns. The FD laddering strategy has several advantages, such as increased access to liquidity and higher returns.
How does the FD laddering strategy help investors benefit from the highest fixed deposit interest rates?
Here is a comparison of the FD laddering strategy with a regular FD investment strategy. Here is how this strategy can help investors benefit more from their FD investments:
Regular FD investment
If an individual wishes to invest ₹ 10,00,000 in a regular fixed deposit for five years, their invested amount will grow at a lower rate of interest for five years. In case of an emergency, the individual can withdraw their amount before the maturity date but will have to bear a penalty.
In case the individual opts for a tax-saving FD, the lock-in period will restrict them from withdrawing any amount until the maturity date. Moreover, the investor will not benefit if the bank decides to increase its FD rates next year since an FD’s rate remains the same during its tenure.
FD laddering strategy
Assuming the individual in question decides to book five FDs instead of one with their investment amount (₹ 10,00,000), each worth ₹ 2,00,000, they can benefit from higher interest rates. One must remember, however, that the FD laddering strategy works only if the maturity dates are “laddered.” Therefore, in this scenario, the investor will book five FDs with maturity dates of 1, 2, 3, 4, and 5 years, respectively and an investment amount of ₹ 2,00,000 for each FD.
By doing so, the investor’s money will be invested for a higher interest if the interest increases the following year. Furthermore, they can benefit from higher liquidity without breaking their FDs. It is important to note that the investor must reinvest the FD proceeds they receive at the end of the maturity period.
Advantages of the FD laddering strategy
Here are some key benefits of reinvesting one’s FD maturity proceeds,a employing the FD laddering strategy.
| Advantage | |
| Higher liquidity | Investors can benefit from higher liquidity without having to break their FD investments. The “laddered” maturity dates help investors access a segment of their funds at regular intervals. |
| Helps investors deal with reduced interest rate risk | If interest rates rise, an investor who employs the FD laddering strategy will still benefit from higher returns since their FD returns will be reinvested at potentially higher rates. |
| Higher returns | As market conditions change, so do the interest rates, and investors can benefit from changing interest rates by adopting the FD laddering strategy. Doing so helps them increase their overall returns. |
| Lesser reinvestment risk | Investors can reinvest their principal amount at the prevailing interest rates since the deposits mature at different intervals. This mitigates the reinvestment risk associated with long-term FD investments. |
| Better tax planning | FD laddering can help investors manage their tax liabilities more efficiently. |
Conclusion
The FD laddering strategy is a prudent way to reinvest FD proceeds smartly. It involves creating a ladder of FD investments with varying FD maturity rates. Doing so can help investors access their invested FD amount at regular intervals, thereby increasing liquidity and can help them benefit from increased FD rates in the future.
If you wish to grow your savings through the FD laddering strategy, you can open a series of online fixed deposit accounts with “laddered” maturity dates with IndusInd Bank. Enjoy attractive interest rates of up to 7.75% and experience a seamless 100% digital process for booking an FD.
