Ever wondered if laddering your fixed deposits is the smart investment move for your business’s short-term financial needs? In the last few years, fixed deposit laddering has gained popularity among individual investors and businesses for fund parking. However, the benefit of FD laddering is not straightforward.

In today’s KOFFi break, let’s understand whether fixed deposit laddering aligns with the financial goal of your business and how it works.

What is FD Laddering?

Fixed deposit laddering is an investment strategy that involves parking funds in multiple FDs that have varying maturities. Consider it like building a financial staircase.

Imagine creating a timeline of investments that mature one after another. The main purpose of fixed deposit laddering is to maintain a balance between earning steady returns and having access to the funds at regular intervals.

Many businesses use this strategy to optimize their FD returns and keep liquidity and flexibility, without blocking their funds in a single FD plan.

How Does FD Laddering Work?

Do you know about the series of dominos? After one single push, all the dominos fall at different times.

FD laddering works in the same manner. After maturing each of your fixed deposits, they will bring you money at a different time.

Rather than parking your entire business cash in one single FD, break it into smaller chunks and invest them regularly in multiple intervals.

Let’s break this down with a business case example:

Assume you targeted to invest ₹5,00,000 of your business cash in FDs. You split the entire 5 lakhs in this way.

• ₹1,00,000 for 3 months at 6.5% p.a.
• ₹1,00,000 for 6 months at 7% p.a.
• ₹1,00,000 for 9 months at 7.25% p.a.
• ₹2,00,000 for 12 months at 7.5% p.a.

Below are the calculated returns as of respective FD:

• 3 months: ₹1,625
• 6 months: ₹3,500
• 9 months: ₹5,437
• 12 months: ₹15,000

Total returns: ₹25,562

The real game challenger is that when my 3-month FD matured, I had the flexibility to park it over for a full year, essentially creating a continuous cycle. Each time a fixed deposit matured, I could understand my business needs and current interest rates before deciding what to take the next step.

This way, I wasn’t just earning interest, but I was building a dynamic cash management system that adapted to my business’s changing needs.

Limitations of FD Laddering for Businesses

After knowing all the benefits of fixed deposit laddering, it’s crucial to know its limitations and drawbacks. More specifically for businesses, FD laddering comes with a series of challenges. Here’s the list:

1. Lower Overall Returns
   • Short-term FDs typically offer lower interest rates
   • Splitting your business cash investments means you’re not maximizing higher rates on longer tenures
2. Administrative Overhead
   • Managing multiple FDs requires more paperwork
   • Tracking various maturity dates needs dedicated attention
3. Opportunity Cost
   • Money in shorter-term FDs might be better utilized in business operations
4. Tax Implications:
   • Interest income from FDs is taxable as per your income tax slab. This results in lesser returns after taxes.

When FD Laddering Makes More Sense?

FD laddering doesn’t work well for all types of businesses, depending on their conditions. It works brilliantly for businesses that have mastered their cash flow game.

But here’s an important thing, it’s not just about having predictable cash flows. FD laddering makes perfect sense when you’re building your business’s emergency fund.

Let’s say you’re targeting to build an emergency fund of ₹20 lakhs over two years. Instead of letting that money sit idle in your current account or locking it all up at once, you can ladder it. This way, if an emergency hits, you’re never more than a few months away from accessing at least part of your funds without paying any penalties.

Here are some cases where FD laddering shines, particularly for long-term planning:

• When you have predictable, long-term surplus funds
• For businesses with consistent cash flows
• When building an emergency fund that grows over time
• For companies with regular, predictable expenses

Better Alternatives for Short-Term Business Finances

For short-term business needs, consider these potentially more suitable options along with their highlighted benefits:

1. Debt Funds
   • Better liquidity than FDs
   • Potentially higher returns
   • No penalty for early withdrawal
   • Professional management
   • Higher flexibility

      

2. Treasury Bills
   • Government-backed security
   • Good for ultra-short-term needs
   • Better liquidity in secondary markets

      

3. Commercial Paper
   • Typically offers better returns compared to traditional FDs
   • Suitable for both small and large ticket investments.
   • Can be traded in the secondary market before maturity.

Final Thoughts

As you read above, FD laddering can be a solid strategy for short-term business finances depending on the condition of the business. The key is to balance safety, returns, and accessibility. For most businesses, FD laddering works wonders.

Remember, the best financial strategy is one that aligns with your business’s unique cash flow patterns and operational needs. Consider consulting with a financial advisor to create a customized short-term investment strategy that works for your specific business situation.