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Bank FD laddering technique: How to avoid premature withdrawal from fixed deposits

  • Bank FD Laddering is a better way to manage liquidity
  • It also averages out your interest income

Bank fixed deposit also known as term deposit is one of the most popular investment products in our country. It is preferred by investors of all ages to put their idle money and earn guaranteed returns. Bank FDs are safe and can be easily liquidated whenever needed. However, a premature withdrawal will attract some penalty. Like SBI charges a penalty of 0.5% for retail term deposit of up to 5 lakh across tenures. You can avoid premature withdrawal from your bank FDs and paying a penalty on it through a technique called ‘Bank FD laddering’. Read on to know more.

Bank FD laddering is a technique which involves buying multiple FDs maturing on different time periods. It is a better way to manage liquidity. All you need to do is divide your lumpsum investment into smaller investments and spread them across maturities.

For an instance, you want to put 5 lakh in a bank FD. Instead of creating a single FD worth 5 lakh, you can break it into five smaller FDs and invest across different maturities. This way you can have five FDs maturing after one year, two years, three years, four years and five years in a row. This way you will have ample liquidity. If you need some money, you can take out and reinvest the remaining money for the next, say, five years, at your discretion.

Similarly, the second FD which will mature after two years can be reinvested for another five years. This will create a chain of FDs. This will make sure your liquidity needs are met throughout.

Bank FD Laddering is widelyu used by retirees to earn regular income.

Well, this is a simple illustration of how bank FD laddering works. You need not divide the money equally across FDs. You can choose different maturities, like, one FD maturing after one year, second FD maturing after one and half years and so on.

You can design the ladder as you wish. You may also combine multiple investment products to suit your needs.

Bank FD laddering average out your interest income.

When you buy bank FDs across different maturities, they will not offer you the same interest rate. Also when your FDs mature, the interest rates on offer then could be higher or lower than when you initially invested in FDs. Bank FD laddering will average out the interest rates earned over the long term. This may protect you from investing the whole sum at a lower interest rate and losing on an opportunity to earn higher interest.

There is also a possibility that at the time of reinvestment, the interest rates are lower than when you invested earlier.

You can also choose different banks to invest in different FDs and take advantage of insurance of 5 lakh on your deposits in case of bank failure.

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