The Reserve Bank of India (RBI), in its last policy, hit the pause button on repo rate hikes. However, the recent overall rise gives fixed deposit (FD) investors a favourable scenario. They are anticipating the benefit of all previous big repo rate hikes to be passed on to the bank FDs. While nothing certain can be said on that, two strategies that can help investors now are FD laddering and the barbell route.
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Fixed deposit laddering is a process of spreading investment in FDs over multiple maturity tenures or maturity buckets, whereby investors hold the chance to earn a higher return and even address the liquidity needs. On the other hand, barbell allows investors to distribute their portfolio between short-term and long-term FDs, without having any exposure to intermediate term FDs.
Understanding FD laddering and the use case
If one has to invest a lump sum of Rs 10 lakh in a five-year FD, he can divide it into smaller parts with the laddering technique. This can be of Rs 2 lakh each across maturities ranging from 1-5 years. They can choose to invest smaller sums in shorter duration FDs and incrementally increase the quantum of investment into longer tenure FDs.
With this, they will have FDs maturing each year, which would provide the liquidity buffer. In case of emergency, they can liquidate the smallest tenure FD, thus minimising the amount lost in the form of penalties.
FDs are viable for short-term capital protection, such as in case of parking emergency funds. As interest rates are on an upward track, it is best to ladder investments and invest them for shorter periods so that investors can reinvest them on maturity to get higher returns, experts say.
By choosing FD laddering, an investor can make the most of fluctuating rates of interest, instead of locking funds at a rate which turns out to be lower in the long run.
Laddering will also take care of liquidity issues and provide investors with regular returns periodically. Investors who mainly depend on FDs, especially senior citizens, can use it effectively to enhance their return.
Understanding barbell strategy and when it is useful
According to Naveen Kukreja, Co-Founder and CEO at Paisabazaar, the barbell strategy is usually used in bond investing.
"This is useful during rising rate interest rate regimes as the maturity of short-term bonds would allow the investors to purchase long-term bonds with higher yields. Likewise, this should be used during rising interest regimes in fixed deposits too. However, many bond market indicators are showing signs of the interest rates peaking. Using the barbell strategy now can be counter-productive, if interest rates stay flat or start to fall in the near future," Kukreja told CNBC-TV18.com.
Thus, fixed depositors should use the barbell strategy only if they have strong convictions of interest rates rising in the near future. Else, Kukreja thinks they should select FD tenures based on their investment horizon and the highest slab rates offered by various banks.
Currently, several scheduled banks are offering FD yields of 8 percent and above. Thus, depositors should use their existing surpluses to book such high-yield FDs, especially if those high yields are offered for longer tenures. Here's a look at current FD rates of key banks:
(Source: Bankbazaar)
(Edited by : Shoma Bhattacharjee)
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