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What Is Fixed Deposit Laddering?

Adhil Shetty

How does FD laddering help me make the most of falling or rising interest rates? — S. Prathap

Answer:

The fixed deposit is one of the favourite investment instruments of risk-averse investors. However, the interest rate on FD may fluctuate, so an investor may find it difficult to decide when to invest, withdraw and reinvest to get the right rate.

For example, you invested in a three-year FD at 7% PA, but after one year the interest rate on the three-year FD rose to 9%. So you may feel you lost 2% interest. But after the completion of three years, when you planned to reinvest your proceeds in another FD, the interest rate had fallen to 6.5%.

You can ensure a consistent return, maintain adequate liquidity and flexibility while investing in FDs by using the laddering strategy.

With it, you need to invest in FDs by distributing the investment across different tenure with varying maturity and interest rates. For example, you want to invest Rs. 5 lakh, so you can invest Rs. 1 lakh each with a maturity period of 1, 2, 3,4 and 5 years, with your interest rates varying between 7% and 9%.

Laddering also allows an investor to withdraw from FD investment in a liquidity crisis without disturbing the entire investment. The rate of return is averaged out over a period of time, so there is lower chance of losing out on a higher interest rate.

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