With equity markets seeing volatility amid geopolitical tensions in the Middle East, investors are shifting from risk-on assets such as equity mutual funds and stocks to fixed-income instruments such as bank fixed deposits (FDs).
Potential returns from equities remain uncertain and depend on how long the military conflict in the Middle East continues. The situation could affect international oil prices, including the Strait of Hormuz — a key global oil transit route — along with supply chains, industries, currency stability and inflation.
A section of investors — especially those who entered the market near its peak — has seen wealth erosion in a short period. Many are now focusing on capital protection.
Bank FDs offer fixed and steady returns, unlike market-linked instruments such as stocks and mutual funds. However, making ad hoc investments in FDs may not be an effective approach.
Instead, following a fixed deposit laddering strategy can help.
What Is Fixed Deposit Laddering?
Fixed deposit laddering is a strategy where investors spread FD investments across multiple maturity tenures or maturity buckets — for example, six months, one year, two years and three years — instead of investing the entire amount in a single FD.
This approach can help investors manage liquidity while seeking better returns from bank FDs.
The laddering strategy ensures that one FD matures at regular intervals. Each FD in the ladder matures at the specified tenure.
The amount from the maturing FD can either meet liquidity needs or be reinvested depending on the requirement and the prevailing interest rate scenario.
Example
Assume you have an investible surplus of Rs 10 lakh. You can deploy this amount by laddering investments across different tenures.
In this example, the investible surplus of Rs 10 lakh is divided equally. However, the allocation does not have to be equal. Investors can customise the amounts based on their needs.
For instance, a larger amount may be invested in a tenure offering a higher interest rate, while a smaller amount may be placed where the interest rate is lower.
If interest rates rise in the future, the maturing FDs can be reinvested at higher rates, which may improve returns over time.
Interest Rate Outlook
Inflation risks remain due to tensions in the Middle East. Volatile energy prices and possible supply disruptions in the Strait of Hormuz may affect inflation and interest rates.
If the monetary policy stance turns hawkish — hawkish means the central bank prioritises controlling inflation — interest rates may rise, particularly if Brent crude oil remains above US $100 per barrel.
However, the outcome depends on how the GDP growth and inflation dynamics evolve.
At present, CPI inflation remains within the Reserve Bank of India's comfort range. A rate cut may not come soon.
If CPI inflation rises above 5%, the Reserve Bank of India may consider a pre-emptive rate hike. The central bank will need to balance growth and inflation.
Using the laddering strategy allows investors to manage reinvestment risk — reinvestment risk refers to the possibility of earning lower returns when reinvesting funds.
If interest rates rise, investors may benefit from higher yields. If rates do not rise, the maturing funds can be deployed in other asset classes depending on the outlook.
This flexibility is one reason FD laddering may work better than investing the entire surplus in one maturity bucket.
The approach allows investors to access funds at regular intervals without breaking the FD prematurely. It releases capital at maturity and provides liquidity for different needs.
If the funds are not required immediately, investors can renew the FD for a chosen period. This supports compounding and helps build a larger corpus.
The laddering strategy can also be applied by spreading FD investments across multiple banks. This reduces concentration in a single bank.
Tips to Maximise Returns on Bank FDs
- Link your savings account and use auto fixed deposits — a facility where surplus funds from a savings account automatically move into an FD once the balance crosses a set limit.
- Choose the investment tenure carefully. Prefer the cumulative plan — where interest is reinvested — instead of monthly or quarterly payouts, unless regular income is required.
- Select the FD tenure carefully and avoid premature withdrawal, as it reduces the benefits of compounding.
- At maturity, renew the FD if the funds are not required immediately so that compounding continues.
A disciplined approach to investing in bank FDs can support financial stability during periods of market uncertainty.
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What Are the Tax Implications?
Interest earned on bank FDs is taxable under the head “Income from Other Sources” and is taxed according to the applicable income tax slab.
Banks deduct tax deducted at source (TDS) at 10% if total interest earned in a financial year exceeds Rs 50,000 for non-senior citizens and Rs 1 lakh for senior citizens.
If a PAN is not provided or is not linked with Aadhaar, TDS is deducted at 20%.
If total income falls below the taxable limit, submit Form 15G for non-senior citizens or Form 15H for senior citizens at the beginning of the financial year to avoid TDS deduction.
To Conclude
FDs remain a way to grow savings during market volatility and economic uncertainty.
Investors should select banks with sound financial health and prefer systemically important banks. Avoid choosing banks offering interest rates significantly higher than the market average.
Higher interest rates may carry higher risk.
When investing in bank FDs, follow a balanced approach and maintain asset allocation suited to your financial goals.
Happy investing!
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