Here's how you can avoid premature withdrawals from your bank fixed deposits

A better way to manage interest rate risk and provide some liquidity to funds as well is to 'ladder' one's deposits across different tenures. Laddering is an investment strategy in which an investment is made in one or more financial products with different maturity dates. Laddering helps avoid the risk of reinvesting if the interest rate environment is unfavourable and does not restrict to one product. One may invest across bonds and FDs at varying maturities.

This is how you can ladder your FD investments. Instead of, say, locking in funds in a 1-year deposit, spread the investment across 1, 3, and 5-year FDs. When the shortest-term FD matures, renew it for the longest duration and continue the process as and when the various FDs get matured. While doing so, ensure that your regular income need is met, and deposits are spread across various maturities and banks. This also ensures liquidity needs are met even over a longer time horizon.

Primarily if your concern is liquidity, locking in funds over a long term in FD is a big problem. Herein lies the advantage of sweep-in fixed deposits that provide the best of both worlds - Interest rate of a FD plus liquidity of a savings account. A sweep-in FD (also known as money multiplier or 2-in-1 account), comes with interest rates comparable to a regular FD and enjoys the liquidity benefits of a savings account. Further, in using sweep-in accounts, there is no penalty on utilising funds as and when required, i.e., there is no penalty on premature withdrawals.

If one chooses to go with such a sweep-in deposit, any amount above a certain threshold limit in the saving account is automatically converted into an FD. Say, if you have Rs 1.78 lakh in your savings account and the threshold limit is Rs 22,000, then Rs 1.56 lakh will automatically be moved out and converted into an FD. And, in case you have insufficient funds in your savings account, the deficit will be made good by withdrawals from your FD and funds will be moved back into the savings account.