Ladder your investments

Dividing the investment across different banks controls the default risk but in what can be done about the risk of locking your money for a long tenure at the low rates? As the interest rates of the fixed deposit keeps changing in the multi-year cycles. So to avoid this risk one must build a ladder of fixed deposits which have different time periods.

For instance if an individual has 4 lakh to invest then he must split the amount in four deposits of 1 lakh each for different time periods like one, two, three and four years respectively. When the one year deposit matures then one can reinvest the maturity amount in the 4 year fixed deposit and so on. This will help in balancing the increase and decrease in interest rates over the period of time and will also ensure liquidity because there will be one deposit maturing every year.