One of the most popular investment methods in our country is Bank fixed deposit also known as a term deposit. Bank deposits are used to put the money idle and earn guaranteed returns, this method is preferred by investors of all ages. Bank FDs are safer than any other investment mode and can be liquidated easily whenever needed. However, some penalties will occur for premature withdrawal. For a retail term deposit of up to ₹5 lakhs, SBI charges a penalty of 0.5 percent.
Bank FD laddering is a method that can be used by any depositor to avoid premature withdrawal from the banks’ fixed deposit and also avoid paying penalties on it. This is a method in which the depositor can buy multiple fixed deposits maturing at different time periods. This is a great way to control liquidity. All that one needs to do is split the lump sum investment amount into a smaller investment that has different time periods and therefore will mature at different dates. For example, you want to invest ₹10 lakhs in a bank fixed deposit. Here instead of creating a single FD worth ₹10 lakh that will mature after the agreed period of time you can divide the total amount into 5 FDs of smaller monetary value which will mature at different periods of time. So you can open the first FD worth ₹2 lakhs that will mature in 1 year, another ₹2 lakhs FD that will mature in 2 years, another FD maturing in 3 years, and in the same way you can have 5 FDs maturing at 5 different times. So if you are in need of any immediate cash you can claim the FD maturing in the first year and take out the money, you also can reinvest any remaining money for any further period of maturity. In this way, one can have enough liquidity.
Retired people widely use bank FD to earn a regular income, as bank FD will provide them a monthly fixed interest amount. In the FD laddering method, one can divide the money as per his wish or as per any specific plan that the bank maintains. One also has the freedom of choosing the maturity period of the deposit in terms of years and months. One can also combine multiple investment plans to meet his needs. The FDs will also have different interest rates based on the maturity periods of each FD.