“Certificate Deposit: A Safe & Reliable Investment Option”

Selecting an appropriate financial tool becomes vital when it comes to planning & securing your financial future. There are many options available, such as mutual funds, stocks, government bonds, fixed deposits, etc. One of the known options available, there exists one more choice, i.e. Certificate of Deposit. But before learning how a CD works, it is important to understand the term- what is investment? It is an item or asset that is acquired with the objective of income generation over a period of time.

A Certificate of Deposit is an RBI-governed financial tool that is issued in dematerialised form & provides fixed income. It is a form of short-term investment where banks & depositors agree upon an agreement. Under this agreement, banks agree to pay an interest factor on your investment amount. A Certificate of Deposit includes a one-time deposit, which cannot be used for a period of 6 months to 3 years. They are only allowed to be withdrawn at high interest rates.

Things to Consider While Investing in a CD

Provided are the things to be considered while investing in CDs:

• Tenure

The longer the investment tenure, the higher the interest rates would be. This is a period where your funds get locked & untouched for a specified duration.

• Returns

After conducting proper research, comparing the options available &understanding the potential returns, make a well-considered decision.

• Interest Rates

You must consider the economic changes, as the interest rates are dependent upon the economic conditions & can have an impact on the returns as well.

• Limited Liquidity

They come with limited liquidity as the funds are invested for a short duration.

• Investment Duration

The longer the duration, the better the interest rates & returns.

Features of Certificate Deposit

Provided are the features of Certificate Deposit:

• Availablity

Certificate of Deposits are the most secure types of investment, which are available at commercial banks, All India Financial Institutions, Regional Banks, etc., as permitted by the RBI.

• Tenure

Individuals get flexibility in making choices between investments as the tenure differs in the case of different financial institutions. In case of SCBs, it is 3 months to 1 year, & in case of financial institutions, it ranges between 1 year & 3 years.

• Interest Rate

These instruments are issued by financial institutions or credit institutions offering interest on a floating basis.

• Issuance

Many recognised financial institutions are allowed to issue Certificates of Deposits as per the RBI guidelines.

• Minimum Investment

The minimum amount of investment is INR 1 lakh.

• Eligibility

Individuals, corporations, & small & large-scale businesses are allowed to invest in CDS. NRIs are issued CDs on a non-transferable basis.

• Transferability

CDs can be transferred either by delivery or endorsement, further enhancing the ease of transaction & liquidity.

• Lock-in-Period

CDSs do not have any lock-in period, which offers flexibility to investors to access & reinvest their funds without any restrictions.

Eligibility Criteria

Provided are the eligibility parameters to be met to invest in a Certificate of Deposit:

• CDs are the RBI-governed financial tools that are issued by financial institutions & scheduled commercial banks.
• These investments can be issued only to individuals,corporations, & small & large-scale businesses. However, the NRIs are eligible to get issued CDs on a non-transferable basis. This depicts that the nation’s funds remain in the nation itself & cannot be taken out.
• Banks & financial institutions are not allowed to issue loans against certificates of deposits, maintaining the integrity of investment.
• Banks are not allowed to buy their own CDs before the maturity date, ensuring market stability. However, the RBI may relax the rules & regulations temporarily.
• Banks must maintain the Cash Reserve Ratio (CRR) & Statutory Liquidity Ratio (SLR).

Steps to Buy a Certificate of Deposit

Provided are the steps to buy a Certificate of Deposit:

Step 1: The buyer & seller should first agree mutually on the price of the transaction & its quality as well.

Step 2:  The seller will deliver the instruction slip to authorise their depository participants.

Step 3: The slip will contain the instructions to set up a debit to the seller’s account & transfer the certificate of deposit in the name of the buyer.

Step 4: In case of any query or confusion, you can also get a professional’s assistance.

Difference between Certificate of Deposit & Fixed Deposit

Provided are the differences between a certificate of deposit &a fixed deposit:

Basis of Difference	Certificate of Deposit	Fixed Deposit
Minimum Amount of Investment	The minimum amount of deposit is INR 1 lakh.	The minimum investment amount is INR 1000.
Return on Investment	The CDs issued by organisations offer higher interest rates in comparison to commercial banks.	Under a fixed deposit, the interest rate ranges between 3.5% & 8%.
Investment Tenure	This investment is considered a short-term investment, which has an investment tenure of around 1-3 years.	This investment is considered a long-term investment, which has an investment tenure of around 10 years.
Collateral	It does not allow for applying for a loan against the certificate of deposit.	This allows you to apply for a loan against a fixed deposit.

 

Pros & Cons of a Certificate of Deposit

Provided are the pros of a Certificate of Deposit:

• Some of the certificates of deposits offer better returns in terms of Annual Percentage Yield, even more than a savings account.
• They are easy to access, enhance fund protection, & help promote discipline in savings. 
• It helps in better financial planning by projecting funds in multiple investments depending on objectives.
• Helps get a stable rate, which ensures guaranteed returns.

Provided are the cons of a Certificate of Deposit:

• No withdrawal is allowed, hence limiting liquidity.
• Penalties are charged in case of an early withdrawal of funds, i.e. before the due date.
• Increased interest rates have an impact on the yield of a deposit.

Conclusion

A certificate of deposit offers guaranteed returns when funds are invested in short- to medium-term investments. For individuals looking for predictable & secure returns on investments, CDs are the appropriate choice, as they align with the conservative preferences of risk-averse individuals. They are considered to be the most reliable source for the preservation of wealth & savings.