How to maximize returns from fixed deposit (FD) laddering strategy after repo rate pause? (2024)

Akshar Shah, founder, Fixed

FD laddering is a strategy where an investor spreads their investment across multiple FDs with different tenures and interest rates, creating a "ladder" of maturity dates. This allows for regular liquidity and the opportunity to reinvest at potentially higher interest rates in the future. Here are some steps to make the most of FD laddering strategy:

1. Monitor Interest Rate Trends: Keep an eye on interest rate trends and forecasts to identify opportunities to reinvest at higher rates.

2. Reinvest Maturities: As each FD matures, reinvest the proceeds into a new FD with the longest tenure in the ladder for potential higher returns.

3. Assess Liquidity Needs: Consider your liquidity needs and financial goals before implementing the FD laddering strategy. If you need higher liquidity, invest larger amounts in short tenure FDs and vice-versa.

Advantages of using the FD laddering strategy

1.Diversification: Spreading investments across FDs with different tenures and rates minimizes the impact of interest rate fluctuations and provides a balanced approach.

2.Regular Liquidity: FD laddering provides periodic liquidity as FDs mature at different intervals, allowing investors access to funds for financial goals or emergencies.

3.Potential for Higher Returns: Reinvesting proceeds from shorter-term FDs at potentially higher interest rates may result in higher overall returns compared to a single long-term FD.

4.Maximizing returns: Splitting your investments across various tenures and issuers enables you to access to best rates across banks and corporates

5.Flexibility: FD laddering allows investors to adjust their investment strategy based on changing interest rate trends, financial goals, and liquidity needs.

6.Tax Planning: Staggering FD maturities can help manage tax liabilities more efficiently, optimizing tax outflow.

7.Simplicity: Laddering is a simple investment strategy that can be easily implemented by investors of various experience levels

Let's consider an example where an investor today allocates Rs. 1,00,000 across four different FDs with varying tenures and interest rates from different banks and financial institutions to ensure he gets the best rates on all FDs and the various benefits of laddering.

1. Unity Small Finance Bank: 6-month FD at 8.75% interest rate (Rs. 25,000)

2. Bandhan Bank: 24-month FD at 8.00% interest rate (Rs. 25,000)

3. Bajaj Finance: 44-month FD at 7.95% interest rate (Rs. 25,000)

4. Shriram Finance: 60-month FD at 8.50% interest rate (Rs. 25,000)

As each FD matures, the proceeds can be reinvested in new FDs with the longest tenure in the ladder, or used for liquidity requirements, depending on the investor's financial goals and needs.

Using this FD laddering strategy, the investor can potentially take advantage of the best interest rates available across different tenures, while still maintaining regular liquidity through staggered maturities of the FDs.

CA Jay Desai

Before we start to discuss how FD laddering can benefit you, let’s first understand what the strategy is. It’s an investment strategy where you divide your investment into multiple fixed deposits (FDs) with different maturity periods. The idea is to invest in FDs that mature at different times, so you always have some portion of your investment available to reinvest at prevailing interest rates. This helps to minimize the risk associated with fluctuations in interest rates and maximize your returns.

Let's say you have Rs. 1 lakh to invest in fixed deposits (FDs) in India. Instead of investing the entire amount in one FD, you divide it into multiple FDs with different maturity periods. For instance, you can invest Rs. 20,000 each in 1-year, 2-year, 3-year, 4-year, and 5-year FDs. This way, you have a portion of your investment maturing at different times.

Now, let's consider how you can make the most of FD laddering strategy in the current interest rate regime in India:

Let's say you have Rs. 5 lakhs to invest in fixed deposits in India, and the prevailing interest rates for 1-year, 2-year, 3-year, 4-year, and 5-year FDs are as follows:

1-year FD: 5.5%

2-year FD: 6%

3-year FD: 6.5%

4-year FD: 7%

5-year FD: 7.5%

Instead of investing the entire amount in one FD, you can divide it into multiple FDs with different maturity periods using the FD laddering strategy. For instance, you can invest Rs. 1 lakh each in 1-year, 2-year, 3-year, 4-year, and 5-year FDs.

After one year, your 1-year FD would mature, and you would receive Rs. 1.055 lakh (i.e., Rs. 1 lakh principal plus Rs. 5,500 interest at 5.5% rate). You can reinvest this amount in a new 5-year FD, taking advantage of the higher interest rate of 7.5%. At the same time, your other FDs would continue to earn interest at their respective rates.

After two years, your 2-year FD would mature, and you would receive Rs. 1.12 lakh (i.e., Rs. 1 lakh principal plus Rs. 12,000 interest at 6% rate). You can reinvest this amount in a new 5-year FD, again taking advantage of the higher interest rate of 7.5%. At the same time, your other FDs would continue to earn interest at their respective rates.

You can continue this process for the next three years, reinvesting the matured FDs in new 5-year FDs at the prevailing rates. By the end of the fifth year, you would have earned a total interest of approximately Rs. 2.73 lakh, which is a higher return compared to investing the entire amount in a single 5-year FD at the prevailing interest rate of 7.5%.

This example demonstrates how the FD laddering strategy can help you earn higher returns on your investments by taking advantage of the prevailing interest rates and minimizing the risk associated with fluctuations in interest rates.

CA Mahima Vachhrajani

FD’s have again gained their popularity amongst investors with the increasing FD interest rates due to increasing repo rates by the RBI.

And why not? When one says do not put all your eggs in one basket, one of those eggs should definitely be FD’s because FD as a mode of investment gives you fixed and guaranteed returns for both short and long term investments.

But as an investor we always tend to maximize our returns in every instrument we invest. And hence FD laddering is an effective way through which you can maximize your interest on FD’s. While investing in FD’s we always try to do various permutations and combinations in terms of deposit amount, tenure and frequency of payment so that we get maximum interest.

We can tweak our investment in FD to earn higher returns while ensuring liquidity at all times which is a concern with FDs as premature withdrawal of FD results in reduction of returns. So timing your FD is an important element for maximizing your returns. And the timing factor isn’t limited to the right tenure only – you can get returns from multiple FD’s with different maturity periods by planning them well in advance. And this is where laddering deposits come into picture.

So if we expect that going forward FD interest rates will be increasing and If you are not a risk taker and believe in investing in FD’s then one must follow the concept of FD laddering.

Let us understand FD laddering by an example let us say you have 6 lakhs to invest today

You divide this 6 lakhs in the following manner:

You can open 3 separate FDs of Rs.2 lakhs each in say April with the following tenure and rate of interest:

1. 1st FD for a tenure of six months giving an interest of 6.6%

2. 2nd FD for a tenure of one year giving an interest of 6.9%

3. And last FD for a tenure of two years giving an interest of 7.2%

Now as and when the first 2 lakhs FD matures in October, you can invest it further for a longer duration, say two years at the interest rate prevailing in October if it is found to be better at that point of time.

So in our example if the interest prevailing in October for 2 years FD is 7.5% then through FD laddering instead of putting the first 2 lakhs at 7.2% for 2 years straight in the first instance when interest rate for 2 years FD was 7.2% you are now putting it for 7.5%. So you can enjoy an additional interest of 0.3% for the coming 2 years.

Similarly as and when 2nd and 3rd FD matures you can invest it further in different tenures as you think may deem fit.

This way, you can earn different rates of interest on different term deposits.

Rahul Jain, President and Head, Nuvama Wealth

The RBI kept the repo rate unchanged in the most recent monetary policy review, indicating a possible pause in the rate hike cycle. However, it has maintained its stance of withdrawal of accommodation, which means it may consider raising interest rates if inflation does not come under control.

In this scenario, banks and other financial institutions have largely raised interest rates. Investors should not postpone their investment decisions in the hope that interest rates will rise further. In effect, strategies such as FD laddering may no longer be able to optimise portfolio yield in the future.

Shiv Rajvanshi- an Entrepreneur

FD laddering is a smart investment strategy that can help you maximize your returns and manage risks by spreading out your investments across different maturities. By aligning your ladder with prevailing interest rates, you can earn higher returns and reduce your exposure to interest rate fluctuations."

For example, let's say the prevailing interest rate is 5%. With an FD laddering strategy, you could invest in multiple fixed deposits with different maturity dates, such as one for 6 months, one for 1 year, one for 2 years, and one for 3 years. By doing this, you can take advantage of the higher interest rate on the longer-term deposits while still having access to some of your funds every 6 months or so.

As the interest rates change, you can adjust your ladder accordingly. For instance, if interest rates are expected to rise in the near future, you may want to invest in shorter-term deposits to take advantage of higher rates sooner. Conversely, if rates are expected to fall, you may want to invest in longer-term deposits to lock in higher rates for a longer period.

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Published: 18 Apr 2023, 08:43 PM IST