A Fixed Deposit (FD) laddering method is a strategy used by individuals to manage their investments in fixed deposits. Fixed deposits are a popular investment option where you deposit a lump sum amount with a financial institution for a fixed period of time, and in return, you receive a predetermined interest rate. The interest is generally higher than what you would get in a regular savings account.
FD laddering involves splitting your investment into multiple fixed deposits with different maturity dates. The basic idea is to stagger the maturity dates so that a portion of your funds becomes available at regular intervals. This strategy offers several advantages:
Liquidity: By laddering your FDs, you ensure that a portion of your investment becomes liquid at regular intervals. This can be useful for covering expenses or taking advantage of investment opportunities without having to break all your FDs at once.
Interest Rate Management: You can take advantage of changes in interest rates. For example, if interest rates are expected to rise, you can lock in some of your funds into longer-term FDs to capture the higher rates, while keeping some funds in shorter-term FDs in case rates continue to rise.
Risk Mitigation: Laddering helps spread the risk associated with reinvestment. If you had invested all your funds in a single, long-term FD and interest rates drop significantly when it matures, you would have to reinvest at the lower rate. With laddering, only a portion of your funds is subject to this risk at any given time.
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