FD laddering: How to build wealth via fixed deposits

FD Laddering: Fixed Deposits or FD is a preferred investment option for people who have a low-risk appetite as it gives guaranteed returns in a fixed tenure. However, one disadvantage of FD is that investors cannot break it prematurely. If one breaks it before maturity, then they have to bear the loss. In such a situation, there is a technique called ‘FD laddering’ which can be used. FD laddering will help in keeping the money liquid as well as help build a bigger corpus.

Let’s have a quick glance at what is FD laddering and how one can create wealth through this technique:

What is FD laddering?

When there is a possibility of a rise or fluctuation in FD interest rates in the near future, it is best to invest in a series of FDs over a period of time rather than one long-term deposit. This method of investing in many FDs is known as FD laddering.

How does FD laddering work: Calculation

According to FD laddering, investors need to invest in the FD for different tenures. To put things into perspective, suppose an investor wants to invest Rs 10 lakh in FD. In this case, he/she should invest Rs 2 lakh in 1, 2, 3, 4 and 5 years each.

Step two is to reinvest the FD money with interest received for another 5 years. In this way, every year the FD matures, investors should keep reinvesting it for the next five years. This will help in increasing the corpus over a period of time.

Benefits of FD laddering for senior citizens

Senior citizens can also use this technique to create consistent income. Every year after the FD matures, it can use its interest amount and reinvest the outstanding amount. Due to this, every year they get a little income through FD and their deposited amount is completely safe.

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