By investing in fixed deposits, you can earn attractive returns on your savings. A fixed deposit account is a type of savings instrument wherein you can invest for a fixed tenure and get good returns at maturity. It pays you a fixed rate of interest on your savings. Normally, a fixed deposit cannot be withdrawn before its maturity date. However, by giving prior notification to banks, you can withdraw your deposits.
Since fixed deposits are offered for different tenures at different rates, you can choose to invest for a particular tenure, either short or long, based on your convenience and get returns accordingly. However, given that interest is expected to fall by around 100 basis point over the course of the year, it is advisable that you invest your savings in long term fixed deposits to avoid risk. Or else, you can take the help of ‘laddering strategy’ to minimize your investment risks and earn attractive returns.
How laddering strategy works?
Soon, the Reserve Bank of India is expected to announce a rate cut on its lending rates. Once, the central bank announces its cut on lending rates, banks may lower their interest rates on fixed deposits. So, keeping this scenario in consideration, it would be advisable for those, who do not want to lock their savings in long term fixed deposits, to embrace the laddering strategy to get the best out of their fixed deposits. A laddering strategy is a kind of investment strategy which enables you to invest in several securities with different maturities. It protects investors from investments risks by locking interest rates at a time. The strategy mostly applies to bonds and certificates of deposit.
The laddering strategy is simple and it helps you break your fixed deposits into multiple fixed deposits for different tenures as per requirements. You don’t have to invest your sum in one single fixed deposit. For example, if you want to invest Rs.1 lakh in fixed deposit, the laddering strategy will help you break that amount equally into multiple fixed deposits for tenures such as 1 year, 2 years, 3 years, 4 years and 5 years as per you choice. And at the end of 1 year, you can reinvest your returns in a fixed deposit for any chosen period, if you don’t need funds. Likewise, at the end of second year, you can again re-invest the amount in a fixed deposit for further five years. Thus, every year you will have one fixed deposit maturing. You can either take out your maturity funds or reinvest it for a longer tenure at attractive rates of interest.
Individuals who need frequent and immediate access to cash, they can use this laddering strategy while investing in for short term fixed deposits. The main idea behind this strategy is to help you get the best out of your investments. If you need cash, you can use your maturity funds or else you can reinvest that amount and earn more returns.
In case of regular long term fixed deposits, if you withdraw your funds prematurely, you may end up losing your entire interest amount. Again, if you invest in short term fixed deposits, the return is very nominal. So, considering all these aspects, the laddering strategy is best suitable for those who need funds at regular and short intervals. If you don’t need fund at short intervals, then the best idea would be to invest your savings in long term fixed deposits and earn maximum returns.