Pros & Cons of FD Laddering

Posted on Thursday, July 27th, 2023 | By IndusInd Bank

Fixed deposit laddering is a strategic investment technique that involves dividing your investment into schemes with varying maturities. This is done to improve liquidity and optimise returns at fixed FD interest rates. Apply for FD schemes with varying tenures at IndusInd Bank to optimise FD rates of return.

Fixed Deposits (FDs) are by far one of the safest investment options for investors looking to steadily grow their savings. However, investing in FDs when interest rates are expected to fluctuate can adversely affect returns. Additionally, investing in a long-term FD can lock in funds and affect liquidity for the investor.

To overcome these challenges, many investors adopt FD laddering. This is a technique wherein the total investment amount is spread across multiple FDs of varying maturities. This helps with maintaining liquidity and minimising the impact of FD interest rate fluctuations. At IndusInd Bank, we offer attractive interest rates and flexible FD tenures, so investors can take advantage of laddering.

Read on to know more about the pros and cons of FD laddering.

How Does Laddering Work?

FD laddering is a strategy that involves investing a lump sum in FDs of different tenures instead of a single one. This technique helps avoid locking in the investment amount at one interest level and maturity. This ensures that some deposits mature periodically and become available to the investor for their use.

Say, you have a sum of INR 90,000 that you wish to invest in an FD. Instead of putting the entire amount in one FD, split it into three parts of INR 30,000 each at a maturity of 1 year, 2 years, and 4 years. Here, you create a ladder of investments – when the first FD matures after a year, you can use these funds to meet your financial needs or reinvest them for a higher duration.

Pros of FD Laddering

1. Better returns

By investing funds in multiple schemes over different tenures and FD rates, you can enjoy higher returns than if you invest in a single long-term FD. Additionally, you can reinvest the interest income along with the principal amount upon maturity to enjoy even higher returns with the power of compounding.

2. Liquidity

Investors can maintain higher liquidity by investing in multiple FDs with varying maturity periods. This way, should a financial requirement arise, one can take advantage of a maturing FD instead of having to liquidate an ongoing one.

3. Higher Safety

FD laddering allows investors to spread their investments across multiple tenures and FD rates, thus mitigating the risk of investing the entire amount in one FD at a fixed rate. With IndusInd Bank, you can book multiple FD accounts for tenures ranging from 7 days to 10 years and keep your investment secure.

4. Tax Savings

FD investment earnings are subject to taxation as per the Income Tax Act. If the interest income on FD investment exceeds INR 40,000 for regular citizens and INR 50,000 for senior citizens in a financial year, it will attract a TDS deduction. However, since FD laddering helps spread your investment across multiple smaller FDs, every individual FD earning less than INR 40,000 (INR 50,000 for senior citizens) in interest in a year will be exempt from taxes, helping you save on overall tax payments.

Cons of FD Laddering

1. Inflation risk

FD laddering can work against your financial goals if the FD interest rates decline. In the long run, the returns from FD might not be able to beat inflation. This may impact your real returns and wealth creation efforts.

2. Fixed returns

While FD laddering can optimise your returns by spreading the investment amount, it may still offer lower growth than other investment options, such as equity investments.

Wrapping Up

FD laddering is a strategic approach that allows investors to balance liquidity, stability, and returns in their portfolios. By spreading the lump sum investment over multiple tenures, investors can enjoy better returns and mitigate the risk of fluctuating FD interest rates.

If you’re looking to invest in an FD for attractive returns, apply for IndusInd Bank fixed deposits online.

Disclaimer: The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. Hence, you are advised to consult your financial advisor before making any financial decision. IndusInd Bank Limited (IBL) does not influence the views of the author in any way. IBL and the author 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.