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Fixed Deposits

What is FD Laddering

What is FD Laddering

Fixed deposits are investment options in which you invest a certain amount for a fixed tenure at a predetermined interest rate. They are considered one of the safest choices because they provide guaranteed returns regardless of market fluctuations.

However, this safety comes with a downside. Once you lock in your money at a fixed rate, you risk missing out on higher returns if FD interest rates rise in the future, as newer FDs may offer better rates. This is where FD laddering can be the ideal solution.

What is FD Laddering?

Fixed deposit laddering is a smart investment strategy that divides funds into multiple fixed deposits with varying maturity dates. Traditionally, investors would place all their funds into a single fixed deposit. However, by using the fixed deposit laddering strategy, you can spread your idle funds across several deposits with staggered maturity schedules.

How is FD Laddering done?

Let us assume you have Rs 3,00,000 to invest and want to create an FD ladder. Here’s how it can be done.

Principal (Rs)Maturity period (years)Rate of interest (%)Returns(Rs)
Rs 1,00,00017.25 %1,07,450
Rs 1,00,00028.00 %1,17,166
Rs 1,00,00038.25 %1,27,760

The total return through FD laddering will be Rs 3,52,376. On the other hand, if Rs 3 lakh is invested in a single fixed deposit for 1 year at a 7.25% interest rate, the return will be Rs 3,22,349.

The benefit of laddering is that you can reinvest every time your FD matures. As the one-year FD matures, you reinvest it at the higher prevailing rates in a two-year FD, and so on.

Benefits of FD Laddering

FD laddering offers several benefits that can help improve an investor’s portfolio. It allows your money to grow steadily over time in several key ways.

1. Maximised returns

By spreading your investment across multiple FDs with different maturity dates, you can take advantage of rising interest rates, which can lead to better returns in the future.

2. Increased liquidity

With FD laddering, you’ll have access to funds more regularly since one of your FDs will mature every year.

3. Tax efficiency 

If the returns on an FD exceed Rs 40,000, it will attract a TDS deduction. With FD laddering, individual FD earnings are lower, allowing you to mitigate the impact of taxable interest income and manage tax liabilities more effectively.

Final thoughts

FD laddering is a systematic and smart strategy for achieving safety, flexibility, and returns in an investment portfolio. It ensures periodic access to liquidity and helps mitigate the impact of fluctuating interest rates.

When investing in an FD, it's important to consider options offering competitive returns. For example, corporate fixed deposits available on platforms like Tata Capital Moneyfy provide higher returns than regular banks while still offering a level of safety.To know more, visit the Tata Capital Moneyfy website or download the Tata Capital Moneyfy App today!