According to reports, in the laddering strategy, the amount to be invested in FD should be divided — but not in the same FD.
A fixed deposit (FD) is the first choice for risk-averse investors. Nowadays, the interest rates on FD are also great. With features like good returns and negligible risk, FD has only one drawback. That is, in this case, the money is tied up for a period. If one withdraws money before maturity, then they have to pay the interest loss and penalty separately. As per the latest reports, some smart investors have found a solution to this. They have changed their method of investing in an FD. They invest money in FD not in the usual way, but by adopting a laddering strategy.
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By making fixed deposits through the laddering strategy, not only can one get more interest, but one also has to face less liquidity shortage. There is usually no need to break the FD when there is a need for money. If it happens, then there is not as much loss on premature withdrawal, as there is on FD done in the ordinary way. Today, let’s take a look at what the laddering strategy is and how it helps optimise interest and liquidity.
What is the laddering strategy?
According to reports, in the laddering strategy, the amount to be invested in FD should be divided — but not in the same FD. Instead of investing all the money in a single fixed deposit, one needs to divide that money into three parts. Then invest it equally in fixed deposits with tenures of 1 year, 3 years, and 5 years. In this way, a ladder of FD will be created. As soon as the 1-year FD matures, reinvest it in a 3-year FD. Similarly, as the FD matures, keep extending it.
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What are its advantages?
The advantage of making FD through a laddering strategy is that one will get more interest. Generally, banks give higher interest on FDs for 3 years. One will get three types of interest on the money, and it will be more than the interest they get from the combined investment made in a fixed-term FD.
The biggest disadvantage of long-term loans is that we lose money in our hands. Many people have to break their FD when they suddenly need money. But if we have invested money in multiple tenured FDs, then one or the other of our FDs will mature at short intervals. With this, we will not face a shortage of money in times of need.
