Smart investors always look for ways to improve their returns and still have a well-balanced risk profile. A suitable method you can utilise is to use your Fixed Deposit (FD) investments in splitting. Splitting the money with different tenure FDs would give you higher interest and better liquidity.
How to Invest in FD Laddering: Split your FD investments and obtain maximum returns.
What is FD laddering?
This means FD laddering, where an investor divides their investment amounts into a few small FDs with differential maturity periods. Instead of putting a lump sum into a long-term fixed deposit, you invest the money in smaller deposits that mature every 3, 6 or 12 months.
Key Questions to Consider:
1. How Much Should I Invest In FDs
2. Pick the number of FDs you would like to open and the tenures in which you need money.
3. Split your total investment amount among such FDs equally.
4. Invest it back in your new FD with a longer tenure so that when the previous deposit matures, the principal and interest will be reinvested into the new FD with a longer tenure.
5. Repeat this until you consistently have short-term and long-term FDs.
FD ladder example
Let’s say you want to invest ₹5 lakh. Instead of placing the entire ₹5 lakh in a single 5-year FD, split it into five separate FDs of ₹1 lakh each, with tenures of 1 year, 2 years, 3 years, and so on, up to 5 years.
When an FD matures, you will then put the proceeds into another 5-year FD, which matures, and a portion of your investment will pay off every year whilst the rest keeps accruing higher returns.
Advantages and Disadvantages of Splitting FD Investments
Pros:
- Higher returns: FD ranges from different tenures, and you can invest through FD laddering. This will enable you to pool your overall returns better than when investing in a single FD.
- Balancing: This method balances the portfolio by dividing your funds amongst different FDs with various maturity dates. You can deposit the money with any number of banks or in different FDs.
- Liquidity Enhancement: FD investments will liquefy when you receive maturity amounts from every FD. You will not have much liquidity anywhere to the extent of locking in your FDs in support of a single long-term investment.
Cons:
- Time: This wants attention and maturity payback cells
- Dependence of maturity income rates: A falling interest rate environment might not offer this strategy the most favourable returns. If FD interest rates are stable, splitting your investments across multiple FDs could be less lucrative than a single long-term FD.
Conclusion
Using laddering to split your FD investments is one smart way to Structure the returns with some level of liquidity. Dividing your corpus into several FDs with different tenures ensures the maximum possible FD interest rates, diversification, and periodic liquidity from your investments. But before you go on an FD laddering spree, you better evaluate your financial goals and the state of the market.