Why should you ladder your investments to beat low FD rates?

© Abhishek Vedpathak
Why should you ladder your investments to beat low FD rates?

For the past few years, the investment world seemed set in its ways, but the occasional repo rate cuts came along to upend this notion. This year however, repeated rate cuts have brought down repo rates to an all-time low, thereby driving banks and financial institutions to make several cuts to fixed deposit interest rates. As a preferred investment option for most customers, there is a lot to like in fixed deposit, which offers ease of investment, attractive returns, and luxury of high liquidity. For risk-averse investors, you really couldn’t ask for more.

Since the beginning of this year, markets have seen unprecedented fluctuations in fixed deposit interest rates. These sudden variations in rates have left many investors in a quandary about whether to reinvest their funds or perhaps consider alternative investment avenues. However, with unfavorable market trends and a struggling economy, determining a low-risk, high-yield investment instrument is like finding a needle in a haystack.

However, laddering your investments is a simple strategy that ensures favorable returns amidst low fixed deposit rates.

What is Laddering?

Laddering is a simple strategy that enables you to spread your investments so you can minimize risks. In this technique, multiple investment vehicles with varying maturity periods are taken to create what is called an investment loop. You can also create fixed deposit ladders by investing in multiple fixed deposit instruments with different tenors. Essentially, the strategy calls for spreading out your entire corpus instead of investing your entire fund in one fixed deposit.

Laddering your investments can be a great option under these three circumstances.

Scenario 1: Increase in Interest Rates

You invest in FD at 7% interest per annum for five years. After one year, FD interest rates increase to 8%. This essentially means that you’ve lost an opportunity to take advantage of higher interest rates. In the hindsight, if you had made the same investment, but for one year, you could have gained more by re-investing at a higher interest rate (8%).

Scenario 2: Interest rates fall on maturity

You invest in FD at 7% interest per annum for five years. At the time of maturity, you see a sudden decline (over the last six months) in interest rates — let’s say 6%. Now, you find yourself in a predicament because you have just received the full maturity amount, which includes the principal and interest. And the only two avenues remaining are that either you reinvest that money at a lower interest rate, for a shorter tenure. Even if interest rates are low, you can wait for the right time to invest again, when interest rates increase.

Scenario 3: Emergency Fund Requirement

You invest Rs. 5,00,000 in FD at 7% interest per annum for five years. Six months down the line, you are in dire need of funds, say Rs. 1,00,000. In order to tide over these urgencies, you decide to withdraw your FD prematurely. Now, you will have no option but to withdraw the full invested amount, i.e., Rs. 5,00,000. As a result, you would receive no interest income or may even have to pay a penalty. Depending on the bank or financial institution, this amount could range between 0.5% to 1%.

In all the above scenarios, laddering your deposits could have been a prudent move that would have enabled you to evade loss of opportunities, or returns.

Laddering Investments with Bajaj Finance Fixed Deposit Schemes

Instead of investing in a single FD scheme for five years, let us assume you invest Rs. 5,00,000 in 5 different Bajaj Finance online FD schemes, as the institution offers some of the highest FD rates in India. Each one of the fixed deposit plans should have a different maturity date spread out with equal intervals between each FD scheme. Let’s take a look at the following example.

FD Amount

Tenure

Interest Rate

Interest Payout

Maturity Amount

Rs. 1,00,000

1 year

6.35%

Rs. 6350

Rs. 1,06,350

Rs. 1,00,000

2 years

6.55%

Rs. 13,529

Rs. 1,13,529

Rs. 1,00,000

3 years

6.85%

Rs. 21,990

Rs. 1,21,990

Rs. 1,00,000

4 years

6.85%

Rs. 30,346

Rs. 1,30,346

Rs. 1,00,000

5 years

6.85%

Rs. 39,275

 Rs. 1,39,275

You can reinvest the amount received on maturity of each deposit, which creates a re-investment cycle or an investment loop. This will ensure you remain invested in the long run, as a result you will enjoy the high interest rates prevalent at the time. Additionally, each of the five fixed deposit plans can have completely different parameters based on your preference.

Benefits of Laddering with Bajaj Finance Fixed Deposit Plans

Bajaj Finance FD is one of the safest investment avenues offering lucrative returns and easy investment facilities. Here’s a look at some of the best benefits of choosing to ladder your deposits with Bajaj Finance Fixed Deposit.

● Highest interest rates when compared to banks and other NBFCs

Even in the present low interest rate regime, Bajaj Finance offers one of the best FD rates, in comparison with other banks and NBFCs.

Let’s look at a comparison between interest rates offered by Bajaj Finance Limited and other banks and NBFCs.

Financial Institution

FD Tenure/ Interest Rate

Maturity Amount Under Laddering*

Other NBFCs (average)

1 yr

5 yrs

4.90%

5.35%

Rs. 558,785

Bank (average)

4.90%

5.80%

Rs. 568,258

Bajaj Finance Limited

6.35%

6.85%

Rs. 611,490

*Note: Principle amount Rs. 500,000 calculated over tenure from 1 to 5 years.

Thus, from the above table, it is clear that you can reap the highest returns by laddering your deposits in a Bajaj Finance FD.

● Mitigate risk of fluctuating interest rates with ease

Laddering your deposits requires ease of investment processes, along with the ability to manage all your deposits in 1 place. This is where investing in a Bajaj Finance FD can be a rewarding experience, as you can invest easily with an end-to-end paperless online process. You can also track and manage your deposits easily through Experia app.

● Diversify your investments in the safest Fixed Deposit

With the highest safety ratings of FAAA by CRISIL and MAAA by ICRA, Bajaj Finance is one of the safest investment option for you to diversify your investments. There is no safer way to reap the benefits of fluctuating interest rates, than investing in this FD.

● Plan your investments with Bajaj Finance FD Calculator

Bajaj Finance Fixed Deposit Calculator is one of the best ways to determine the returns you can gain, on your deposit. All you need to do, is enter your intended investment details, and you can find out the payout amount and maturity date, before you invest.

• Monthly savings with Systematic Deposit Plan (SDP)

Another great laddering strategy is to invest in Systematic Deposit Plan (SDP) by Bajaj Finance Limited, where you can save on a monthly basis with contributions starting Rs. 5000 each month. The strategy for laddering your investments with SDP largely remains the same, but because you have the option to save monthly, this gives you far more flexibility in re-structuring your investments when interest rates are higher.

Laddering your fixed deposit payments is the smart way to grow your finances during times of uncertainty. This strategy lets you make the most of favourable interest rates, and provides a level of flexibility unknown to other investment vehicles. In the hindsight, you could wait out these turbulent times, but when you consider the interest you will end up losing by not laddering your investments, your losses are sure to add up considerably.

This is a partnered post.