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Business News/ Money / Personal Finance/  How to maximise bank fixed deposit returns? Explained with bank FD laddering technique
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How to maximise bank fixed deposit returns? Explained with bank FD laddering technique

Bank FD laddering is a technique that involves buying multiple FDs maturing in different time periods

Bank FD laddering involves diversifying your investment across multiple FDs with different maturity periods and interest rates. (Pixabay)Premium
Bank FD laddering involves diversifying your investment across multiple FDs with different maturity periods and interest rates. (Pixabay)

Bank fixed deposits (FDs) are a popular choice among conservative investors aiming for consistent returns over time. Bank FDs are safe and can be easily liquidated whenever needed. However, a premature withdrawal will attract some penalties. Bank FD laddering will help you avoid premature withdrawal and paying penalties

Bank FD laddering

Bank FD laddering is a technique that involves buying multiple FDs maturing in different time periods. Personal Finance experts suggest that investors seeking to invest in bank fixed deposits for a longer period may consider a ladder strategy. 

“The FD laddering strategy, outlined by industry experts, presents a valuable approach for optimising these investments," said Amit Gupta, MD, SAG Infotech.

Key things to know about bank FD laddering technique

Bank FD laddering technique involves dividing the investible amount into three or four tranches, differing in terms of amounts and periods. An investor can decide the amounts and periods basis own expectations.  

FD laddering involves diversifying your investment across multiple FDs with different maturity periods and interest rates. By doing so, you create a "ladder" of maturity dates, ensuring periodic liquidity and the potential for reinvesting at higher interest rates when the opportunity arises, said Amit Gupta.

The strategy begins with monitoring interest rate trends to identify optimal times for reinvestment. As each FD matures, you reinvest the proceeds in a new FD with a longer tenure, potentially yielding higher returns. Adjusting your FD allocation to align with your liquidity needs and financial goals is also crucial, added Gupta.

Benefits of FD laddering

The benefits of FD laddering include diversification, regular access to liquidity, the potential for increased returns, and flexibility to adapt to changing interest rate environments. Furthermore, it aids in tax planning by staggering FD maturities, and optimising tax liabilities.

According to Amit Gupta, an illustrative example highlights how an investor allocates funds across various FDs with different tenures and rates, maximizing returns while maintaining liquidity through staggered maturities. This strategy empowers investors to benefit from varying interest rates, mitigating interest rate fluctuations.

Things to keep in mind when implementing bank FD laddering

However, it's essential to consider the current interest rate landscape when implementing FD laddering, as its effectiveness may be influenced by market conditions. “Keeping an eye on the Reserve Bank of India's decisions and adjusting your ladder accordingly can help you make the most of this smart investment strategy, ensuring you both maximize returns and manage risks effectively," said Amit Gupta.

After hiking the repo rate six consecutive times since May 2022, the RBI hit the pause button and kept the repo rate unchanged in the last three MPC meetings this year. The decision of the next bi-monthly MPC meeting will be announced by Governor Shaktikanta Das tomorrow, October 6, 2023.

Disclaimer: The views and recommendations made above are those of individual analysts, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.

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ABOUT THE AUTHOR
Sangeeta Ojha
A business media enthusiast. Writes on personal finance, business and banking.
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Published: 05 Oct 2023, 10:41 AM IST
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