Build a corpus through Fixed Deposit laddering 

6 MinsDec 9, 2021

Most investors prefer to park a certain amount in bank Fixed Deposits (FD) irrespective of their risk profile. A bank FD offers fixed and secured returns, helps to plan for certain envisioned financial goals, addresses contingency needs, and is liquid. Moreover, tax-saving is also possible by investing in a 5-year Tax Saver FD. From an asset allocation and diversification standpoint, it is sensible to hold some money in bank fixed deposits.

fixed deposit laddering


But to maximise return on a bank FD, you need to devise a smart investment strategy. Fixed Deposit laddering is one such strategy. 

What is Fixed Deposit Laddering? 
  Well, it is a process of spreading your investment in FDs over multiple maturity tenures or maturity buckets, whereby you hold the chance to earn a higher return and even address your liquidity needs. So, say you have a lump sum of Rs 5 lakh, this can be deployed by laddering your investments as under:

FD No.Investment Amount (in Rs))Maturity PeriodInterest Rate (%)Interest earned (in Rs)Maturity Proceed (in Rs)
1100,0001 year 5.755,750105,750
2100,0002 year 6.056,050106,050
3100,0003 year 6.056,050106,050
4100,0004 year 6.056,050106,050
5100,0005 year 6.506,500106,500

The interest rates considered are currently those offered by Axis Bank for senior citizens.
(For illustration purpose only)

With one FD maturing every year, you will have the maturity proceeds available to use (for whatever purpose) or reinvest. Plus, the interest earned would be higher for longer maturities enabling you to earn potentially higher returns. 

Select maturity period, amount as per your needs
You are free to decide the maturity period (i.e. the tenure of your bank FD) as well as the amount to form the ladder that suits your needs. You don't need to invest an equal sum across maturity periods; you may invest a bigger sum for a period that offers higher rates of interest. 

Use laddering for tax-saver FDs too
The FD laddering strategy can also be applied to investing in the 5-year Tax Saver FD. For this purpose, consider depositing your investible surplus in the 5-Year Tax Saver FDs every year persistently for five years. After five years you will receive the maturity proceeds out of your first Tax Saver FD, and after that every year you will receive the maturity proceeds of the ensuing tax saver FDs, i.e. the second, third, fourth, fifth, and so on. 

Avoid premature withdrawal to maximise returns
The FD laddering strategy can help you make the most out of bank FDs, but care should be taken not to prematurely withdraw from the respective bank FDs. Ideally, you should select the tenure and the plan thoughtfully. 

If you are not sure about when you may need to withdraw your FD, look for banks that don’t charge a premature penalty. For instance, Axis Bank charges no premature penalty on pre-closure of deposit on or after 15 months of booking of deposit for deposits booked for a tenure of 2 years and above.

Choose monthly or quarterly pay-out option to meet expenses
If you need funds before the maturity of any of your FDs, you can choose the monthly or quarterly interest pay-out. On the other hand, if you do not require interim cash flows, ideally choose the cumulative plan. Holding multiple fixed deposits in line with your financial goals and liquidity needs is an ideal thing to do. 

Moreover, when you do not require the money at maturity, make it a point to renew or reinvest the respective fixed deposit receipt (FDR) to compound wealth better and counter inflation. 

[Also ReadFive Advantages of a Fixed Deposit]

Benefits of FD laddering strategy 
Note that the fixed deposit laddering strategy could work best, particularly when interest rates in the economy are expected to move up. By spreading the investment, you would have a chance to gain from rising interest rates. It averages out the changes in the interest rates over time. 

By practising the laddering strategy, all your investments are not disturbed in case an emergency arises. With regular maturity proceeds year after year, liquidity is taken care of. And say, there is an emergency for which you need the money before the FD matures, you can always avail of an Overdraft (OD) facility against the FD.   

The FD laddering strategy holds the following advantages:

  • Diversifies investments across various maturity buckets.
  • Different maturity periods, create investment loops (providing the option to reinvest). 
  • Potentially earns higher interest along with the safety of your capital.
  • Addresses liquidity needs with staggering income of the maturity proceeds, helping you avoid premature withdrawals.
  • Works for 5-year Tax Saver FD investments as well.

Interest earned on a bank FD is taxable. If you have no other income apart from interest income, you can avoid TDS (Tax Deducted at Source) by submitting Form 15-G (for general or non-senior citizens) or Form 15-H (for senior citizens), as the case may be.
If you invest in bank FDs following the laddering strategy and with the necessary financial discipline, you can build a respectable corpus to address your financial goals, including contingency requirements. In other words, you could potentially get the best out of your investment in the bank FD. 

Book your bank FD today by investing sensibly across maturity buckets. A bank FD can securely generate wealth and add to your financial security and well-being.

Disclaimer: This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm. Axis Bank doesn't influence any views of the author in any way. Axis Bank & PersonalFN shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.