Use laddering to average out returns, minimise reinvestment risks

Those keen to strike a balance between risk and reward may go for barbell strategy

Fixed deposits (FDs) are offering attractive returns at present. SBM Bank is offering 8.25 per cent for a deposit period of 3 years and 2 days. RBL is offering 8.1 per cent on 18-24-month deposits. Unity Small Finance Bank is offering as much as 9 per cent over 1,001 days.

Experts say while interest rates are at an all-time high, the party may end soon.

Says Anshul Gupta, co-founder and chief investment officer, Wint Wealth: “FD rates are close to the peak and are expected to go down a few quarters down the line.”

In short, this is the best time to get locked in at high-interest rates.

Here are a few strategies that can help you derive the maximum benefits from FDs.

Barbell strategy

This strategy divides the investment portfolio into short-term and long-term FDs, with minimal investment in medium-tenure FDs. Says M Barve, founder of MB Wealth Financial Solutions: “The barbell strategy says that the best way to strike a balance between risk and reward is to invest at the extremes of the risk spectrum.”

Gupta says investors who opt for this strategy can park their emergency funds in short-term FDs and lock in high-interest rates via long-term FDs.

Barve adds that this strategy allows investors to benefit from both the safety of short-term FDs and the higher returns of long-term FDs.

But this isn't a buy-and-forget strategy. Says Adhil Shetty, chief executive officer (CEO), Bankbazaar: “It also requires active portfolio management and a keen understanding of interest rate movements.”

Investors who maintain a sizeable emergency fund corpus and also want to lock in high-interest rates using their remaining FD portfolio can use this strategy.

Says Jinal Mehta, a certified financial planner and founder of Beyond Learning Finance: “This strategy may work well for retirees, as they may need more money in the short-term and less in the long-term.”

Bullet strategy

This strategy involves purchasing several FDs with the same maturity date. Says Mehta: “When the FDs mature on the same date, the portfolio generates substantial earnings all at once at the high end of the yield curve.”

This strategy is often used when an investor has a specific future financial goal or liability in mind and wants to ensure that a lump sum is available at that time. For example, a couple whose child is scheduled to enter college in three years may use this strategy.

Says Shetty: “However, this strategy can lead to limited diversification across different interest rates and economic cycles. It also subjects the investor to reinvestment risk if interest rates fall just before these FDs mature.”

Mehta adds that a downside of this strategy can be the potential high tax burden when all FDs mature at once.

Laddering strategy

This strategy involves spreading your portfolio across multiple FDs over time. So, some amount is parked in very short-term FDs, some in slightly longer FDs, and so on. For example, a Rs 5 lakh portfolio could be invested in Rs 1 lakh FDs across maturities ranging from one to five years.

Says Gupta: “This ensures that your investments are spread across different tenure buckets. This lowers interest rate risk compared to parking entire amounts of money in just long-term FDs.”

By using this strategy, investors can average out the return from FDs over an entire interest-rate cycle.

This strategy also provides liquidity at regular intervals. If the investor needs liquidity, the maturity proceeds can be utilised, otherwise, they can be reinvested.

Says Shetty: “It reduces the risk of reinvesting the entire corpus at lower interest rates, and offers a balance between short-term and long-term rates.”

Mehta points out that laddering is more of a defensive and conservative strategy that manages risk but does not maximise returns.

If you prefer not to use the strategies mentioned, don’t just leave your money in a savings account.

Consider a sweep-in FD instead. This automatically turns any amount over a certain limit in your savings account into a fixed deposit, earning higher interest. No fee is levied for early withdrawal. Most large banks offer this service.