HERE’S AN EXAMPLE OF FD ‘LADDERING’
There are a number of factors to consider when choosing a FD. Firstly, ask yourself, when do you need the money?
If you need it soon, consider a FD with a shorter term. However, if you’re saving for something five years down the line, a FD with a longer term and higher rate may be more beneficial.
Also, consider the economic environment. Whenever it seems that interest rates are expected to rise, or if you want to open multiple FDs, ‘FD laddering’ can be a good option.
Here’s an example. With a FD ladder, you divide your initial investment into equal parts and invest each portion in a FD that matures every year. Let’s say, for example, a person has Dh10,000. To build a FD ladder,
he invests Dh2,000 each in a 1-year, 2-year, 3-year, 4-year and 5-year FD.
As each FD matures, he reinvests the money at the current interest rate or uses the cash for another purpose.
If he reinvests his money, he might choose a new 5-year FD, which would ensure he has one FD maturing each year as long as he continues ‘laddering’.