The Buyt Desk
The fixed deposit is a popular investment among people with a low-risk appetite. It does not come with any risk, except the permanent closure of the bank, which is a rare situation. The government, and the private banks, offer an interest on the corpus deposited in FD, which help investors grow their money effortlessly.
Although the interest rate on FD does not meet inflation, it allows the money to grow because of the compounding effect. The prevailing interest rate in fixed deposits is between 5.5 to 5.6 per cent in government banks and 6 to 6.6 per cent in private banks and other non-banking institutions.
Marginal return on investment and liquidity are two drawbacks of a fixed deposit. If at any time an urgent need for money arises, the investor has no other option except to go for the premature closure of the account. This option is present in FD, however, upon the premature closure of FD, investors receive only the principal amount, and interest is not paid regardless of the period their amount was in the bank.
Laddering Fixed Deposit Is An Answer To This Problem
The laddering fixed deposit means breaking FD into parts. E.g. if someone wants to put five lakhs in FD, then instead of getting a single FD for the entire corpus, create five different FDs of 1 Lakh each with a different maturity period. It can be of one, two, three and five-year maturity tenure. This way, the investor will have cash in hand to reinvest it or to meet other fund requirements.
Furthermore, in case of an emergency, where an investor needs urgent cash, any one of the FDs could be broken, leaving the rest FDs untouched and keeping them earning interest.
Benefits Of Laddering Fixed Deposit
Laddering FD offers multiple advantages. Some of them are:
Variable Interest Rate – The bank’s rate of interest changes every quarter, and it differs according to the period. By laddering, one can incur a variable interest rate for the amount. E.g. Often, the long tenure FDs have a better interest rate than those with shorter terms.
You Will Never Be Out Of Cash – With the laddering fixed deposit option, one can have a fixed deposit, maturing at a regular interval of time, and the investor will never be out of cash.
There Will Not Be Re-investment Risk – Some banks give lower interest rates on the mature FD amount when reinvested. With laddering fixed deposit, it is not the issue.
