There is a whole world of investment options out there, with many ways to increase your savings. A fixed deposit is among the best ways to mobilize your idle savings and have them work for you.
A Fixed Deposit or FD is a financial instrument through which a person (the investor):
1. Gives money to a bank for a certain period;
2. Receives interest;
3. Gets his money back at the end of the period-The deposited money cannot be withdrawn until the maturity of the deposit.
Being considered as safe investments they are also associated with certain risks; they are exposed to a varying degree to fluctuations on the markets prevailing interest rates majorly affecting deposits at the time of renewal.
One of the best way to counteract this risk is with a “stagger” (or ladder) investments, leading to increase chance of obtaining a lower average cost price. This strategy allows you to have access to your money at regular intervals, but take advantage, with some of your money, of the higher interest rates available for longer (short) term deposits. A challenge faced by most of the investors on whether to invest a sum of money for the short term, in the hope that interest rates will improve, or for the longer term with the view of locking in what′s available now – just in case it falls further.
For example instead of putting one large sum of money into one fixed deposit of KES 1,000,000 you break the money into bundles of KES 200,000 each .Once all the money is invested you′ll have equal portions coming up for renewal regularly let’s say at an interval of 15days.By doing so, the highs and lows in interest rates will balance out over a period of time.
Laddering your fixed deposits has some pros and cons as outlined below by Diana Clemet, a Business advisor.
Advantages of laddering term deposits
- Interest rates are usually better for longer periods of time, boosting your returns.
- It′s a structured way to invest.
- This gives you more flexibility than keeping all your investments in one or two large, but shorter terms.
- With chunks of money coming up for renewal regularly you have an increased chance of capturing better rates as they arise.
- You have longer term guarantees as to how much you′d earn on your money than if you had shorter periods. If you′re living off the income from term deposits that certainty can be reassuring.
- When each rung of the ladder is reached and the money released you can choose to go elsewhere.
Disadvantages of laddering term deposits
- The main disadvantage is that you′re locked in for a longer time if you need all of your money unexpectedly.
- If you choose long term deposits you could be stuck in a poor rate for a long time. Whilst 3.50% might look like a decent interest rate today, who knows if it will be in five years′ time. It′s unlikely, but if banks were offering 7% in two years′ time you′d be annoyed about being tied in for five years.
- Laddering involves more paperwork than putting all your money into one or two term deposits.
* You can download my android application to keep track of your fixed deposits here.
Whatever strategy you decide on, ensure that you are getting a comparatively good return.