How to make an FD Ladder & What is Fixed Deposit Laddering?

Did you know that Laddering your fixed deposits can help optimize returns and manage your liquidity requirements much better? To be honest, there is nothing new about this approach as many retirees who depend on FD interest income already follow FD laddering anyways.

But why this sudden focus on the idea of laddering your bank deposits?

Because generally, it makes sense to start laddering your FDs when the interest rates are reversing. And that is exactly what is happening right now with the FD rates set to increase in India in the near future. And if you look at which banks offer highest FD interest rates, then you will see that there is a gradual increase in the FD rates in 2022 and going into 2023.

What is Fixed Deposit Ladder?

When you start making an FD ladder, you essentially divide the amount available into parts and create multiple FDs of different maturity periods initially, instead of booking one big FD for the long term.

Suppose you want to make an FD of Rs 10 lakh. One way is to create one FD of Rs 10 lakh and be done with it.

But what to do if you expect interest rates to rise soon and don’t want to lose out on that? You also don’t want to keep waiting for rates to rise.

This is where the FD laddering technique comes in handy.

You break your Rs 10 lakh corpus in (say) 5 equal parts of Rs 2 lakh each. Now you create FD of each but with different maturities – Say 1 year, 2 years, 3 years, 4 years and finally 5 years. Now as these FDs start maturing from next year onwards, you keep renewing them with a new chosen FD tenure (let’s say 3 years).

So when your 1-year FD matures, it will be reinvested for 3 more years and mature in the 4th year. The 2-year FD will be reinvested for 3 more years and mature in the 5th year and so on.

Here is how it will work exactly:

  • 1st FD of Rs 2 lakh – Booked for 1 year (from June 2022 to June 2023) – 5.2%
  • 2nd FD of Rs 2 lakh – Booked for 2 years (from June 2022 to June 2024) – 5.4%
  • 3rd FD of Rs 2 lakh – Booked for 3 years (from June 2022 to June 2025) – 5.6%
  • 4th FD of Rs 2 lakh – Booked for 4 years (from June 2022 to June 2026) – 5.8%
  • 5th FD of Rs 2 lakh – Booked for 5 years (from June 2022 to June 2027) – 6.0%
  • Renew 1st FD on Maturity – Booked for 3 years (from June 2023 to June 2026) – 6.50%
  • Renew 2nd FD on Maturity – Booked for 3 years (from June 2024 to June 2027) – 6.75%
  • Renew 3rd FD on Maturity – Booked for 3 years (from June 2025 to June 2028) – 7.00%
  • Renew 4th FD on Maturity – Booked for 3 years (from June 2026 to June 2029) – 7.25%
  • Renew 5th FD on Maturity – Booked for 3 years (from June 2027 to June 2030) – 7.50%

So basically, a non-ending loop of FD maturity and renewal is set up. It’s like a chain of FDs. This first helps you average out your interest rates across different rates. Also, it helps you provide yearly liquidity for your requirements. You also don’t need to break one large FD if you can take care of the requirement by breaking one smaller one

FD rates have been quite low for a very long time now. But now, the FD interest rates are all set to increase in India. So this is a good time to consider laddering your FDs if you wish to keep money in fixed deposits.

Nowadays, there is a new option for FD investors where they get a floating interest rate on their FDs. I have also written about this flexible FD in detail here – whether floating rate FD is a good investment option for depositors or not.

So that’s all there is about what is laddering of bank fixed deposits and how to make an FD ladder (2023).

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