FD laddering: How to earn returns and withdraw money without breaking your FD

New Delhi: A Fixed deposit (FD) is not usually the first choice of an investor seeking high returns and wealth growth. A person chooses FD to keep some money aside for different purposes while getting decent gains on it. Choosing a single FD to put away all your money may not be the best option since it may lock-in the entire amount in one place, restricting the liquidity and limiting the returns.

The corpus would grow as per the interest rate applicable under that particular FD, affecting the growth potential of investor's money. Therefore, one may consider FD laddering to ensure liquidity while distributing the corpus across different FDs for savings, even with modest returns.

FD laddering is a strategy which includes dividing the corpus into portions that go into multiple FDs with different tenures and interest rates. It enables liquidity of funds through different tenures, without having to break the deposit and withdraw the entire sum. While one of the FDs matures, others are still locked in as they continue generating interest.

WHY NOT A SINGLE FD?

Breaking the deposit would be the only option left when there is an urgent need of money but all the money is invested in one FD. This may disrupt the person's savings and investment plans.

Laddering is better than investing the money in a single FD for a long tenure, otherwise the entire sum would be out of reach and generate returns at a uniform interest rate, thus limiting the scope. In case of urgent need, you would need to make a premature withdrawal, which carries a penalty of around 0.5-1 percent on the applicable return rate.

FD laddering also allows investors to take advantage of changing interest rate cycles. An investor can assess the rate cycle and lock in at the peak time which can be repeated with all the portions. Even if that does not happen, the money is exposed to different interest rates.

FD LADDERING STRUCTURE

Suppose an investor has a sum of Rs 5,00,000 to invest, which can be divided into 1-year, 2-year, and 3-year FDs. They may allocate the lump sum across these tenures:

-- Rs 1 lakh: 1-year FD
-- Rs 2 lakh: 2-year FD
-- Rs 2 lakh: 3-year FD

Alternatively, FDs with short maturity periods of a quarter or 6 months can be choosen if the money is needed for a near-term goal.

-- Rs 1 lakh: 6-month FD
-- Rs 1 lakh: 1-year FD
-- Rs 1 lakh: 2-year FD
-- Rs 2 lakh: 3-year FD

Either way, the money is constantly growing in other deposits even when one of them matures and is withdrawn.

Following the maturity of one portion, the person may reinvest it in another FD.