An FD ladder can boost your returns; here are 4 ways it can help

Assuming you have a sum of Rs 3 lakh to invest, rather than investing the entire amount as a lump sum for 3 years, you can split it into 3 FDs of Rs 1 lakh each. The first FD can have a tenure of 1 year, the second for 2 years and the third for 3 years. By investing in 3 different FDs with varying tenures, each maturing a year apart, you create an FD ladder.

At the end of the first year, you renew the matured FD for 3 years, creating the next rung on the ladder. The year after, the FD with the 2-year tenure matures and you reinvest it for 3 years, creating yet another rung. This provides you with liquidity at the end of each year. Similarly, you can create an FD ladder with a 5-year tenure with similar annual intervals.

Here are four ways an FD ladder can help.

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When investing in a ladder, you divide your total investment into smaller FDs and book them one by one over a period of 3-5 years. By spreading out the investment interval, the chances of your FD earning the lowest interest rate are substantially reduced. This is because there is a long gap between the first and last FDs, giving you the opportunity to earn higher rates on subsequent FDs.

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When you opt for an FD ladder, you don’t need to worry about predicting the interest rate movement to find the best time to book your FD. This is because you will need to book according to your ladder requirement, making it time-independent. As a result, the interest rate movement will be averaged out, with some FDs being booked at lower rates and some at higher rates. While you may not be able to book all your FDs at the highest rate, you will still be protected against getting the lowest rate on all your investments due to the spread of time and rate.

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Banks offer varying rates of interest across different tenures for FDs. Generally, the highest returns on fixed deposits are given for longer-term FDs, which typically range between 3-5 years. Using a ladder system for your FDs will provide you with liquidity at desired intervals while still allowing you to book all your FDs for the long-term tenure of 5 years. This means that dividing a large FD into several smaller FDs will not prevent you from benefiting from higher interest rates offered by the bank.

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FD ladder has a unique advantage of providing regular liquidity. If you have booked an FD for a long tenure and need the money mid-way, you may have to break the FD often at a loss. However, in an FD ladder, the amount is divided into small parts, with each part maturing at different points in time. It gives you multiple opportunities for liquidity without having to break your FDs midway through their tenure.

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