Laddering FDs: How this strategy helps you make the most of your fixed deposit investments
small finance banks (SFBs) scoring above the rest. For example, Unity Small Finance Bank leads with the most attractive FD interest rate at nine percent per annum, followed by Shivalik Small Finance Bank offering rates at 8.65 percent per annum. Within scheduled private sector banks, SBM Bank stands out with the highest FD interest rates, reaching up to 8.25 percent.
Many public sector and private banks are also offering more than seven percent interest, thus, prompting many risk-averse investors to put most of their earnings in these traditional investments at one go. Risk-averse investors look upon FDs as a preferred option, seeking guaranteed returns and a relatively low-risk investment. However, an associated drawback is the mandatory lock-in period, and early withdrawal incurs a penalty.
The penalty amount varies among banks but typically ranges from 0.5 percent to one percent of the principal amount. In addition to the penalty, withdrawing funds prematurely results in a forfeiture of interest on the withdrawn amount. This is due to the compounding nature of FD interest, where you earn interest on your already accrued interest.
Early withdrawal disrupts the continuous accumulation of interest on both the principal amount and the interest previously earned on that sum. Astute investors employ a laddering strategy when investing in FDs. This involves dividing the funds into smaller amounts and distributing them across FDs with varying tenures.
By doing so, they steer clear of locking up all their capital in a single FD, simultaneously capitalising on the higher interest rates offered by FDs with longer tenures. The following example illustrates how one can implement a laddering strategy for FDs. Suppose you have
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