Here are some top strategies for fixed deposit savers, according to www.bankrate.com.

Stick to short maturities: When rates are very low, fixed-income investors run into increased interest rate risk. If interest rates go up, savers are left holding underperforming investments to maturity or trying to sell them at a loss. While fixed deposit owners may be able to sell their fixed deposit, the more likely scenario would be to break the terms of the fixed deposit and take the early withdrawal penalty. That could eliminate years of interest or even eat into principal, depending on how punishing the penalty fee is.

To minimise interest rate risk, shop for CDs with shorter maturities rather than stretching for yield.

Beware of early withdrawal penalties: Early withdrawal penalties are all over the map and vary among financial banks.

The average penalty for early withdrawal on a long-term fixed deposit equals six months’ worth of interest. For fixed deposit with a maturity of less than a year, the average penalty is equal to three months’ worth of interest.

Save more: With a finite supply of money, individuals may grapple to supplement returns on their own. Some fixed deposits allow you to add deposits, which could at least allow your initial savings to keep up with inflation.

Evaluate options such as the bump-up fixed deposit: Some types of fixed deposits are better suited to today’s low-rate environment than others.

If interest rates go up, a bump-up CD allows the owner to seek a fixed deposit-rate increase. With interest rates possibly rising again, longer-term fixed deposits would seem to be just the ticket for savers concerned about chasing yield and interest rate risk. Unfortunately, they may be hard to come by.

Consider the indexed or structured fixed deposit: Another non-traditional fixed deposit is the structured fixed deposit, which is linked to some other type of investment, such as the stock market, currency market or commodities. Though they won’t lose money as long as they are held to maturity, returns are typically capped at a percentage of the total return of the underlying index or basket of securities.

For example, if it’s linked to the Standard & Poor’s 500 index, and that index returns 10 per cent over the year, a structured fixed deposit may yield three-quarters of that. However, it varies among products. That is one of the criticisms of structured fixed deposits: They can be very complex compared with a conventional fixed deposit.

But the potential for greater returns pulls in savers. There are more downsides though, the most visible of which can be the statement showing the value of the investment dropping from year to year.

Try a (short) ladder: Savers can mitigate interest rate risk, take advantage of higher yields on longer maturities and increase liquidity by splitting savings among fixed deposits of varying maturities. One way of doing that is with a CD ladder.

With an initial investment of N10,000 and a maximum maturity of five years, a saver would divvy her money among a one-year, two-year, three-year, four-year and a five-year fixed deposit.

As the one-year fixed deposit comes due, the proceeds are recycled back into the ladder with the purchase of another five-year fixed deposit. Given the uncertainty about the timing of the next rate hike, it may make more sense to start with a shorter ladder and then extend it after rates go up.

Consider a barbell strategy: A barbell is another fixed deposit investing strategy. It’s very similar to a ladder, but the middle rungs are missing. Short maturities make up one end of the barbell, or investors may even put money in a high-yield savings account to keep part of the principal more liquid. Long-term maturities make up the other end of the barbell.

Shop around: Online banks may offer higher yields than traditional banks. Local banks may offer higher yields than national banks, and any type of financial institution may run fixed deposit specials based on their own cash needs. That’s why it will pay to shop around for the best fixed deposit rates.

Take care when stretching for yield: One of the aims of the monetary policy since the financial crisis has been to push savers and investors into riskier investments. As a result, people who want, or need, higher yields may take on more risk than they can afford. Investors who need to preserve principal to live must be careful about the kinds of investments they buy to meet income needs. Dividend stocks, bonds and structured notes have become de facto fixed deposit alternatives as a result of very low interest rates, but they are far from fixed deposit equivalents. The risk to principal can be very high. There is no free lunch; if it seems too good to be true, it probably is.

Consider higher-risk investments: If you are comfortable taking some risk with principal, it could pay to venture out of the fixed deposit realm and into those bonds, structured notes or dividend stocks that we just cautioned you about. After all, leaving your money in fixed deposits is also risky — you may not lose principal, but you will lose purchasing power if inflation exceeds the yield you’re receiving, which it most assuredly will. Allocating 10 per cent or 20 per cent of your portfolio to other fixed-income investments can help you achieve the yield you’re searching for.

“Fixed deposit rates are really low, so you don’t have to be high risk to get a better return,” says David Rae, president of DRM Wealth Management, a financial advisory firm in Los Angeles. “A conservative portfolio that maybe has some nice dividends is more risky than a fixed deposit, but not exactly high risk and it can do very well for you.”

Investments become more risky as the potential for greater returns grows. Highly rated corporate bonds, like all fixed-income investments, carry interest rate risk but relatively little credit risk or the chance that the issuer will become insolvent. High-yield bonds may offer more return but include the possibility that the issuer will go bankrupt. The value of stocks can rise and fall with the market, completely unrelated to the fundamental value of an individual company’s share price.

The type of securities you buy — and the proportions in which they are purchased — should align with your risk tolerance and time horizon. Stretching for yield isn’t always bad — as long as savers understand the upsides and downsides of any potential investments.

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