Smart Ways to Diversify your Portfolio with Fixed Deposits

Posted on Wednesday, January 31st, 2024 | By IndusInd Bank

Who doesn’t wish to grow their money with minimal risks? Everyone appreciates those extra gains. However, each investment carries some risks. While the expectations of high returns often come with the risk of equally high losses, there is an investment option that promises stability and predictability: fixed deposits.

Fixed deposits let you invest your funds in a controlled manner. You decide the amount and the period. Your return rate stays fixed, unaffected by market fluctuations. This feature attracts many cautious investors as you know exactly what to expect from your investment.

The benefits of fixed deposits don’t stop there. You can even use fixed deposits to diversify your portfolio and balance risk and returns. While diversification discussions usually revolve around stocks, bonds, mutual funds, and real estate, fixed deposits are an equally effective tool. Here is how.

Ways to use fixed deposits to diversify your financial portfolio

Here are some strategies to maximise the benefits of fixed deposits and use them to diversify your portfolio.

1. Cumulative and non-cumulative fixed deposits

FDs can be cumulative or non-cumulative. In cumulative FDs, the interest is reinvested and paid along with the principal at maturity. Here, you leverage compounded growth. In a non-cumulative FD, the interest is not added to the principal amount. Instead, you receive regular interest payments, which acts as a steady income source.

Diversifying between these types can provide capital appreciation and income. For example, you can invest in a cumulative FD to build wealth over time and a non-cumulative FD to get regular interest for your expenses.

2. Short-term and long-term FDs

One way to diversify your portfolio is by splitting your investment into both short-term and long-term fixed deposits. Short-term FDs typically have a tenure of 1 to 3 years, while long-term FDs can go up to 10 years. By allocating a portion of your funds to each, you can benefit from different interest rates and liquidity options.
For instance, you might invest a portion in a 1-year FD to meet any short-term goals and the remaining portion in a 5-year FD for high returns and stability. This approach allows you to enjoy both immediate and future benefits.

3. Tax saving FD

A tax saving fixed deposit can be a strategic tool to diversify your portfolio. When you invest in these FDs, you can claim a deduction of up to ₹1.5 lakh per financial year. This benefit falls under Section 80C of the Income Tax Act, 1961.

Note that a tax saving FD comes with a mandatory lock-in period of five years. This lock-in period promotes long-term savings discipline. Also, while the interest income earned on tax saver FDs is fully taxable, the overall tax savings may outweigh the tax liability, especially when strategically planned.

4. Laddering strategy

FD laddering is a strategy to manage and diversify fixed deposits wisely. Imagine you have ₹5 lakh to invest. Instead of putting all this money in one FD, you divide it into different parts. Let’s say you create five FDs of ₹1 lakh each. Each FD has a different maturity period. One matures in a year, another in two years, and so on up to five years. This method is like climbing a ladder, hence the name.

Fixed deposit interest rates change over time. With laddering, you don’t lock all your money at one rate. So, when rates go up, you can reinvest at a higher rate.

Wrapping up your fixed deposit strategies

Diversifying your portfolio with fixed deposits is a wise strategy. It combines safety with growth, helping you create a balanced approach to saving and investing. There’s no shortage of FD schemes to help you grow your wealth. The most important task, however, is choosing the right bank. Consider IndusInd Bank for your FD investments and enjoy high interest rates, convenience of digital process, flexible tenure, guaranteed returns, and multiple interest payout options.

So why delay your financial growth? Open your IndusInd Bank Fixed Deposit today!

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.