With the Reserve Bank of India (RBI) raising the repo rate by 25 basis points to 5.50%, fixed deposit investors are likely to secure better returns in the coming months. When the RBI hikes rates to manage inflation, borrowing becomes expensive. As a result, banks tend to offer higher rates on products such as FDs to attract more deposits.
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Amid widespread expectations that the central bank may continue to hike rates in the coming months, FD investors can benefit by spreading their investments. So, if you are planning to open an FD, putting all your money into one long-term deposit may not be the wisest move now.
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One simple option is FD laddering. Instead of investing your entire amount in one FD, split it into smaller deposits with different maturity dates. Once you enter into an FD, you get a fixed return as per the bank's rules. By laddering FDs around potential rate hike decisions, you can get higher returns on your overall investment:
Example 1: Assuming you lock Rs 5 lakh into single FD:
Investment: Rs 5 lakh
Time: 2 years
Interest: 6.5%
Return: Rs 68,819
Total: Rs 5,68,819
Example: Assuming you split your money into three FDs, where rates are influenced by tenures:
Investing Rs 1 lakh at 6.5% for 2 years
Investing Rs 2 lakh at 7% for 3 years
Investing Rs 2 lakh at 7.25% for 3.5 years
Investment 1:
Investment: Rs 1 lakh
Time: 2 years
Interest: 6.5%
Return: Rs 13,764
Total: Rs 1,13,764
Investment 2:
Investment: Rs 2 lakh
Time: 3 years
Interest: 7%
Return: Rs 46,288
Total: Rs 2.46 lakh
Investment 3:
Investment: Rs 2 lakh
Time: 3.6 years
Interest: 7.25%
Estimated interest earned: Rs 59,000
Total maturity amount: Rs 2,59,000
Total gain in this case overtime: Rs 13,764 + 46,288 + 59,000 = Rs 1.19 lakh
FD | Investment | Tenure | Rate | Estimated interest |
1 | Rs 1,00,000 | 2 years | 6.50% | Rs 13,764 |
2 | Rs 2,00,000 | 3 years | 7% | Rs 46,288 |
3 | Rs 2,00,000 | 3.6 years | 7.25% | About Rs 59,000 |
In second example, by laddering FDs, you are able to gain nearly Rs 50,000 extra return compared to locking all your money at once. Since the RBI is expected to announce further rate hikes in the near future, you can also choose to invest your money in smaller deposits periodically to benefit from higher rates.
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