If you’re an investor who prefers safe and guaranteed returns, fixed deposits (FDs) likely form a significant part of your portfolio. While FDs offer guaranteed returns, they often fall short of beating long-term inflation.
This is why financial experts recommend diversifying into mutual funds and other schemes. However, if you’re risk-averse and still want to maximize your FD returns, there’s a strategy you can use to turn your FDs into a high-yield machine: the laddering technique.
Implementing the Laddering Technique
The laddering technique can be a game-changer for maximizing FD returns. Instead of locking all your money in a single FD, you spread it across multiple FDs with varying durations.
For instance, if you have ₹5 lakh, instead of investing it all at once, divide it into five separate FDs of ₹1 lakh each with terms of 1, 2, 3, 4, and 5 years. This way, one of your FDs will mature each year, providing you with regular liquidity.
How Laddering Works
- Initial Setup: Invest your ₹5 lakh into five FDs with maturities of 1, 2, 3, 4, and 5 years.
- Annual Reinvestment: When the 1-year FD matures, reinvest it for another five years. The next year, when the 2-year FD matures, reinvest it for another five years as well.
- Ongoing Cycle: Continue this process each year. This way, you always have an FD maturing annually, offering regular liquidity while maintaining your investment’s growth.
Benefits of Laddering
Regular Liquidity: You have access to funds annually without breaking your entire investment.
Better Interest Rates: Over time, reinvested FDs can benefit from potentially higher interest rates.
Reduced Interest Rate Risk: Spreading your investment across different terms can mitigate the risk of fluctuating interest rates.
Ideal for Retired Individuals
The laddering technique is particularly advantageous for retirees. After an FD matures, retirees can utilize the interest earned and reinvest the principal.
This approach ensures a steady income stream while keeping the principal amount safe.
By adopting the laddering technique, you can significantly enhance the returns from your FDs, providing a balance of safety and growth.
This method allows you to make the most of your fixed deposits while ensuring regular liquidity and maximizing your wealth over the long term.
