Fixed deposits are among the most popular types of deposits among Indian consumers. The high rates of interest for flexible tenures ranging from 7 days to 10 years make it the best alternative for both short and long term investments. FDs have grown in popularity over the years as more people discover the potential for higher returns through this financial instrument.
What are Fix Deposits ?
Fixed deposits are offered by almost every bank operating in the country, be it a private sector one or a public sector undertaking (PSU). There are also lots of other private non-banking financial companies (NBFC) that offer fixed deposit schemes to customers. NBFCs typically give better interest rates to customers, but may lack in credibility in terms of long term assured returns that is associated with government-backed organizations.
Should I be happy with my FD returns?
Technically speaking, the return you will actually receive from the fund is the interest rate that a bank or NBFC is offering to you. Aside from technical considerations like payout frequency that aid in maximising returns, you will probably experiment to find the ideal deposit amount and tenure for your needs. In an ideal world, you would only make your final decision after thorough research. There doesn’t seem to be any more room for improvement, does there?
Several banks have been hiking the interest rates on fixed deposits (FDs), also known as term deposits. Recently, several top banks are offering interest rates of more than 7 per cent to general customers on FDs, or term deposits.
How to earn More from Fix Deposits?
Since Last quarter, the Reserve Bank of India (RBI) has raised repo rates by a total of 225 basis points. This led to the raising of interest rates on lending as well as on fixed deposits (FD) by banks. Several banks have been hiking the interest rates on fixed deposits (FDs), also known as term deposits. Recently, several top banks are offering interest rates of more than 7 per cent to general customers on FDs, or term deposits.
But one does not know whether the rate hike cycle has already ended or will continue for more time to come. The better alternative, therefore, is to opt for the fixed deposit (FD) laddering.
Laddering fixed deposits – enhancing your returns
Laddering deposits is a strategy of staggering out the investment into a number of FD instruments maturing on different time periods. The term laddering deposits draw parallel from staggering the deposits into individual ladders, and the investor can climb the ladder one flight at a time.
Benefits of Fix Deposits Laddering
With the strategy of laddering deposits,
- an investor makes sure that they will always have liquidity of funds for emergencies without having to compromise on the investment term.
- the investment strategy gives the advantage to stay on top of interest rate changes, by investing at the right time to maximise returns.
- helps in reducing losses that may incur due to premature withdrawals.
- when interest rates rise, laddering aids to use periodic maturity amount to reinvest at a higher rate of interest.
- laddering also allows one to access funds at periodic intervals.
Examples of FD Laddering
Let us understand this with the help of an example. Suppose there is Mr A who wants to invest ₹5 lakh in a fixed deposit. But he wants to earn the maximum rate of interest i.e., the prevailing in the market.
There are two options: One is to invest ₹5 lakh in one term deposit assuming that the rates of interest will later on decline. And the second alternative is to open a number of deposits, say five, of ₹one lakh each across multiple tenors to make the most of surging interest rates.
For example
- ₹one lakh FD starts in December, 2023 for six months.
- ₹one lakh FD starts in December 2023 for one year.
- ₹one lakh FD starts in December 2023 for two years.
- ₹one lakh FD starts in December 2023 for three years.
Further, it is vital that the first FD that matures in June 2024 is further invested for a longer duration, say two years.
The second FD that matures in December 2024 should be further invested for another two years. The third FD that matures in December 2025 can be further invested for another three years and finally, the fourth FD is further invested for another three years.
This way, investor can earn different rates of interest on different term deposits.
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Last line
Although one might wonder that a marginal increase of 5 or 10 basis points will not lead to any major difference in the overall returns, but a series of rate hikes can definitely make a considerable difference to the overall sum total of returns.