Home >Money >Personal Finance >How to create a regular income stream with fixed deposits?
FDs offer the convenience of creating a regular stream of cash flows for the investor. (Photo: iStock)
FDs offer the convenience of creating a regular stream of cash flows for the investor. (Photo: iStock)

How to create a regular income stream with fixed deposits?

  • Bank FD laddering is a technique which involves buying multiple FDs maturing on different time periods
  • Some corporate FDs offer a Systematic Deposit Plan (SDP), wherein you can invest in small monthly deposits

Fixed deposits are one of the most convenient investment options for elderly or senior citizens. But given the low interest rates, investors are flocking to corporate or company FDs. Not that the company FDs were any lesser known investment option earlier. Company FDs are one of the favourites of HNI investors who can take an additional risk for extra returns. FDs offer the convenience of creating a regular stream of cash flows for the investor. This option is highly utilised by retired people. Here's how it is done:

Bank/ corporate FD laddering technique

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 7 lakh in a bank or coprorate FD. Instead of creating a single FD worth 7 lakh, you can break it into seven smaller FDs and invest across different maturities. This way you can have seven FDs maturing after one year, two years, three years, four years, five years, six years and seven 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.

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

FD laddering averages out your interest income.

Systematic Deposit Plan (SDP) in corporate FDs

AAA rated corporate deposits offer a 1-2 percentage points higher interest rate than a bank FD. Some of these FDs offer a Systematic Deposit Plan (SDP), wherein you can invest in small monthly deposits. You can choose to collect the maturity amount in lumpsum or in tranches, if you want to create a regular income flow.

For an instance, Bajaj Finance FD offers SDP option where in you can invest in 6 to 48 deposits, and the tenure you choose, gets applied to all the deposits you invest . The maturity date for each of these deposits is different, as your deposits mature as per your tenure selected. Thus,creating a regular income flow.

Be wary of the risks in corporate FDs before investing. Though AAA rated company FDs are available, they do not carry any guarantee of capital safety, unlike bank FDs. They carry default risk.

The interest income in corporate FDs is taxed as per the applicable income tax slab rate.

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