Fixed Deposits, also known as FDs, are a popular choice among conservative investors looking for consistent returns in the long run. They are secure and reliable investment options that offer steady returns to investors. They also provide the benefit of liquidity. Hence, in most cases, you can access the funds in the deposit whenever needed.

However, withdrawing your FD prematurely can attract a penalty. This is when the FD laddering strategy helps. Let us understand more about this strategy and how it can be beneficial.

Overview of FD laddering strategy

The FD laddering strategy is an investment technique. It involves dividing a lump sum investment into multiple FDs. Each FD should have different tenures. Hence, instead of investing the entire amount in a single FD, this strategy requires investors to divide it across several deposits with staggered maturity periods.

The aim of this strategy when opening FDs online is to maintain a balance between earning steady returns and having access to funds at regular intervals.

How does it work?

Investors usually need to follow these steps to implement the FD laddering strategy effectively:

• Determine your investment horizon

The first step in using the laddering strategy when opening Fixed Deposits online is to assess your investment horizon and financial goals. Once you know these, determine your short-term liquidity needs, risk tolerance, and future expenses.

• Divide the investment amount

Divide the total amount you want to invest into multiple segments. Each segment should represent an FD with a different maturity period. These deposits mature at various intervals.

• Select the maturity periods

When opening the FDs online using your Banking app, pick the maturity periods for each FD in a way that aligns with your financial goals. For example, you might opt for one FD with a tenure of six months, another for one year, etc.

• Review regularly

Review the maturity dates of your FDs regularly. Once an FD matures, reinvest the principal amount along with interest earned in new FDs with longer tenures. Repeat this process as each deposit reaches its maturity date.

Benefits of this strategy

The various advantages of using this strategy when opening Fixed Deposit Accounts include the following:

• The different investment periods for the FDs ensure that a portion of your funds is accessible at regular intervals. This offers greater liquidity. It also provides the flexibility to address your short-term financial needs.
• By distributing your money across multiple FDs, you can take advantage of varying FD rates as market conditions change. This lets you optimise your overall returns.
• Since your FDs mature at different dates, you can reinvest the principal amount at the prevailing interest rate. This minimises the effect of potential reinvestment risks associated with long-term FDs.

Conclusion

Now that you have a better understanding of the FD laddering strategy, you can easily use it to boost liquidity and returns.