FD interest rates above 9%; use this strategy to maximise returns from fixed deposits Instead, you should book according to your ladder requirements. This way, the impact of interest rate changes is spread out because some FDs may be booked at lower rates while others may be booked at higher rates
Creating a fixed deposit (FD) ladder is a great strategy for managing fixed income investments. This is especially helpful for investors, such as senior citizens, who rely on these instruments. By dividing the FD into parts instead of booking one large FD for the long term, you can enhance your returns and manage liquidity effectively.4 ways an FD ladder can help
Avoid minimum return: When you use a ladder strategy for your savings, you divide your money into smaller fixed deposits and book them one by one over 3-5 years. By spreading out your deposits over time, the chances of earning the lowest rate on all of your deposits are much lower.#sr_widget.onDemand p, #stock_pro.onDemand p{font-size: 14px;line-height: 1.28;} .onDemand .live_stock{left:17px;padding:1px 3px 1px 5px;font-size:12px;font-weight:600;line-height:18px;top:9px} #sr_widget.onDemand .sr_desc{margin:0 auto 0;} #sr_widget.onDemand .sr_desc{color: #024d99;margin-top:10px;} #sr_widget.onDemand .crypto .live_stock .lb-icon{8px 6px 5px 3px !important} #sr_widget.crypto.onDemand a.text{border-bottom:1px solid #ccc;padding-bottom:5px;display:block;width:100%} #sr_widget.onDemand .sr_desc .text p, #stock_pro.onDemand .sr_desc .text p{font-size:12px;font-weight:400;}
Also read: FD interest rate up to 9.1%: 9 banks have revised fixed deposit terms, rates after new RBI rule
Freedom from timing rate cycles: When you use an FD ladder, you don't need to predict interest rate changes to find the best time to book your FD. You need to book according to your ladder requirements. This spreads out the impact of interest rate changes because some FDs may be booked at lower rates while others may be booked at higher rates. You may not be able to book all your FDs at the highest rate, but you are protected against getting the lowest rate on all your investments due to the spread of booking times and interest rates.
Get the best rate on offer: Banks offer different interest rates for fixed deposits based on the length of the deposit. Typically, the highest returns on fixed deposits are offered for 3-5 years. By setting up a series of smaller fixed deposits, you can still enjoy liquidity at regular intervals while benefiting from the higher interest rates that come with a longer 5-year tenure.
Have ample liquidity without losses: One of the great things about using an FD ladder is that you can access your money when needed. If you have an FD for a long time and need the money before it matures, you might have to close the FD early and lose out on some of the interest. With an FD ladder, you divide your money into smaller parts, each maturing at different times. This way, you have the flexibility to access some of your money without closing the FD before it matures.
How to create an FD ladder
If you have Rs 3 lakh to invest, rather than investing it all at once for 3 years, you can divide it into 3 FDs of Rs 1 lakh each. One FD matures each year, providing liquidity annually. This strategy is known as an FD ladder. Similarly, you can create an FD ladder with a 5-year tenure by reinvesting the matured FD annually.Things to consider when creating a fixed deposit ladder
Here are some crucial aspects to consider when creating an FD ladder, as per the ICICI Bank website.Also read: High FD interest rates may not last long despite RBI status quo; is this the last window to book fixed deposits at higher rates?
Maturity Period Distribution: When implementing an FD Laddering Strategy, carefully plan the distribution of maturity periods. Aim to create a balanced mix of short-term, medium-term and long-term FDs. Short-term deposits offer quick access to funds while long-term ones often provide higher interest rates. The mix should align with your financial goals and liquidity requirements.
Interest Rate Variations: Monitor prevailing interest rates and anticipate potential changes. Since FD rates fluctuate over time, consider staggering your deposits across different periods to take advantage of any rate hikes or lock in attractive rates for extended periods during falling rate cycles.
Financial Goals: Define your financial objectives clearly. Determine whether your primary focus is income generation, capital preservation or a combination of both. Align the FD Laddering Strategy with your goals to ensure it meets your specific financial needs.
Diversification: Avoid placing all your funds in a single bank or financial institution. Instead, diversify your deposits across different banks to mitigate counterparty risk. Research and choose reputable institutions with sound financial standing and attractive interest rates.
Tax Implications: Understand the tax implications of interest income from FDs. Interest earned is generally taxable as per your income tax slab. Factor in tax liabilities while charting your FD Laddering Strategy and consider options like tax-saving FDs to optimise tax efficiency.
Liquidity Requirements: Assess your short-term and emergency fund needs to ensure that you have sufficient liquidity when necessary. Keep some of your deposits with shorter tenures to access funds without penalty, if required.
Monitoring and Review: Regularly monitor your FD Laddering Strategy and review its performance. Stay updated on market conditions, interest rate movements and changes in your financial goals. Adjust the strategy as needed to align with changing circumstances.
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This story originally appeared on: India Times - Author:Faqs of Insurances
