How laddering, barbell can get better returns for FDs

These strategies, along with compounding period selection, maximizes returns from the deposits

- Akshat Rohatgi

The appeal of FDs extends to various segments of the population, including risk-averse individuals and senior citizens. These groups often prioritize capital preservation and seek the reassurance of guaranteed returns. The stability of FDs and their ability to protect against market volatility make them an attractive choice for conservative investors.

Yet, not many retail investors are aware of the barbell or laddering strategies that can fetch them better returns on their FDs.

Barbell strategy

The barbell strategy is an approach that involves dividing the FD portfolio into short-term and long-term fixed deposits, while avoiding intermediate-term FDs. This strategy is implemented to take advantage of potential interest rate fluctuations.

Let’s consider an example with a portfolio of ₹20 lakh. The barbell strategy suggests allocating 40% ( ₹8 lakh) to shorter-term FDs with a tenor of 6 months, and 60% ( ₹12 lakh) to longer-term FDs with a tenor of 3-5 years. Assuming an initial interest rate of 7% for the shorter-term FDs and 8% for the longer-term FDs, the returns over a 3-year period can be calculated.

If interest rates continue to rise for the next 6 months, the shorter-term FDs will mature. The reinvested funds can then be placed in longer-term FDs at a higher rate of 9% for a longer duration.