Banks and non-banking finance companies (NBFCs) in India are increasingly offering higher fixed deposit (FD) rates to their customers. Major lenders including State Bank of India, Axis Bank, HDFC Bank and ICICI Bank have announced multiple FD rate hikes in the past few months.
There's a lot of criticism around the fact that loan interest rates move higher faster than FD rates in response to the Reserve Bank of India's (RBI) repo rate hikes amid inflation. However, even a slower rise in FD rates is good news for investors preferring bank deposit schemes over most other investment options.
But to make the most of such opportunities and ensure you don't miss out on more FD interest rate hikes in the future, you must resort to FD laddering — putting money in FDs in small batches instead of booking a lump sum amount into FD.
The strategy
The FD laddering strategy is simple. It is about investing through multiple FDs instead of booking a lump sum amount in one. Take, for example, you have ₹5 lakh unused in your savings account. You need not put the entire amount into an FD. Instead, divide the amount into three or five equal parts.
You can make five small FDs worth ₹1 lakh each. Else, you can book two FDs of ₹1.5 lakh and put the remaining ₹2 lakh amount in the third FD.
This way, you can book these FDs at different increasing rates. There is another benefit of laddering FDs. In case you need some money, you need not redeem the entire ₹5 lakh. You can just redeem your FD of the smallest amount or that which is nearing its maturity date. This way, your other FD investments lie untouched while your immediate financial requirement is taken care of by a small fixed deposit.
Better liquidity management
Dividing your investment into smaller FDs and dividing them according to different maturity periods is also an excellent way to manage your money. Periodic liquidity is one benefit that you cannot ignore. Small FDs regularly not only afford you the much-desired liquidity but are also a feel-good factor of having enough money in hand. Moreover, the maturity amount that includes interest boosts your morale as you have now more money to save and re-invest.
There is no way that you can predict the FD rate cycles correctly. All you can do is hope and wait. So, while you latch on to your investments at a particular rate for the next six months, you can invest another portion of your earnings at a different rate for a year and then wait to invest your next batch of savings at a further rate with a different maturity date.
This way you have multiple FDs maturity at different interest rates at varying dates. You can continue with your varying investments without feeling frustrated about missing out on higher FD interest rates. Liquidating one or some of them is also easy without having to rejig the entire investment corpus.
