Fixed deposit (FD) interest rates have significantly dropped during the last three years. Currently, the repo rate is at a historic low of 4%, which has not changed since May 2020. This trend has led investors to search for alternative ways to generate income.
Thankfully, there have been small hikes recently in the FD rates of some financial institutions, including the national banks. This hints at the bottoming out of rates and investors need to prepare their strategy to make the most out of this.
So, what are the different techniques you may use to invest for higher returns via bank FDs? Let’s look at some options.
Short or Medium Terms FDs
When the interest rate cycle turns back after bottoming out, it has been noted that short- and medium-term FD interest rates respond quicker to rate change than long-term FDs. Investing in FDs with short or medium-term maturity helps you switch to a higher FD rate. When the rates are expected to go up, you should avoid committing to long-term FDs because you may miss out on the benefit of the rising interest rate. The interest rate may not increase immediately, but it may gradually inch upward. So short-term FDs can keep your FD investments closer to the prevailing interest rate offered by banks, according to Bankbazaar.
Floating Rate FDs
A few banks are offering floating rate FDs to their customers. The interest rate on floating rate FDs may not look attractive compared to the current fixed rate FDs; however, if the rate increases, the floating rate FDs can easily be a winner. Floating rate FDs can be beneficial if you don’t want to get into the hassle of continuously switching old short-term FDs to higher rate FDs.
Diversify New FD Investments Into Bank and Company FDs
When interest rates go up, it’s not only banks that increase their FD rates, but the rates of company FDs are also increased. Diversifying your investment into banks and company FDs can be a good option for better average rates. By diversifying FD investment into banks and company FDs, you can ensure higher returns on your investment. Company FDs offer a higher interest rate, but you need to do your diligence before investing your money.
Use the FD laddering option
FD laddering is an excellent option to ensure a high return on FDs amid the chances of a rise in the interest rate. You can make your own FD laddering strategy by spreading your lumpsum fund into different FDs with multiple maturities.
For example, if you want to invest Rs 5 lakh, you can break it into 5 FDs with a maturity period of 1 year, 2 years, and so on up to 5 years. On maturity, you can use the amount if you have a requirement, or you can continue with the existing laddering by reinvesting the matured corpus into a new FD for 5 years. You may choose different banks, companies and the FD amount while creating an FD laddering strategy.
When the interest rate is expected to increase gradually, you can shift your corpus to an FD that offers a higher interest rate on each maturity. So, you can ensure a higher return on investment in the long term. If you create an FD laddering by investing money in different banks’ deposit schemes, it can also help you get the insurance benefit of up to Rs 5 lakh in each bank.
You must not wait for a rate hike to invest in FDs because it’s not definite when the rate will go up, and there is a chance that it may happen multiple times. So, after each hike, you will get enticed for another rate hike. Until you invest, you’ll lose the return on your corpus. Use these techniques to get the maximum benefit out of your FD investment.