What is a Certificate of Deposit? Features, Benefits, & More

Certificates of deposit are more like regular savings accounts but yield higher returns on the deposited amount. The depositor gets interest paid on the initial investment as per the duration of the CD. The depositor can choose the duration of investment as per their financial needs. A certificate of deposit can be made for as little as six months and can go as high as 10 years. The higher the duration of investment, the better the yields on investment. 

Deeper understanding of the certificate of deposit

A certificate of deposit is a financial agreement between the bank and the depositor where an amount is locked for a specific period of time. It is a bank-regulated instrument in which a bank is liable to pay promised interest on the deposited amount. Upon maturity of the deposit, if the depositor fails to decide what needs to be done with the matured amount, the bank has the authority to automatically renew the certificate after 7 days from the maturity date. Banks issue certificates of deposit in electronic form and also restrict the holder from withdrawing money during the deposit period. If the depositor wishes to withdraw the amount during the tenure of the deposit, they will be liable to pay a penalty. Once the certificate of deposit matures, depositors have access to both the principal amount as well as the interest earned.

Features of a Certificate of Deposit

Whether it is a small investment or a high-risk investment, the investor should always research and analyze the pros and cons of the investment scheme they opt for. Since the RBI guidelines vary from time to time, it is important to have a better understanding of the investment schemes like certificate of deposits. Below are some features to make you aware of what this scheme is all about: –

• Investment Amount: As per the latest RBI guidelines, certificates of deposit can only be initiated with a minimum deposit amount of Rs 5 lakh. Investors can opt to have multiple CDs, but that is only possible in multiples of Rs 5 lakh only.
• Eligibility: Neither every bank is allowed to issue a certificate of deposit, nor every individual is allowed to hold a CD. RBI has laid certain conditions for purchasing CD’s. 
• Maturity Tenure – Banks can issue CD’s for a maturity period of a minimum of 7 days and a maximum of 1 year. However, financial institutions are allowed to provide a maturity period of 1–3 years. That is the reason CD’s are considered a short-term investment scheme.
• Rate of Interest: Interest rates on CD’s are higher as compared to other short-term investment schemes like NSC’s (National Savings Certificate). Use the NSC calculator to know which is the better investment option for you. However, unlike fixed deposits, certificates of deposit can have both floating and fixed rates of interest. 
• Taxability: CD’s are taxable as per the Income Tax Act 
• Loan on CD-Although banks and financial institutions do not grant loans on CDs, RBI can offer explicit permission to an individual to get a loan depending on various criteria. However, banks have the option to buy back CDs before the maturity period at the current market rates.

The Benefits of Investing in CDs

There are various benefits of investing in certificates of deposit. Some of them are listed below for better understanding from a common man’s perspective:

• CDs are securities that are backed by the government. Hence, the amount is kept safe, unlike high-risk investments like bonds or mutual funds that are volatile in nature. Therefore, it’s safe to say that CDs are a less-risky investment option.
• Unlike the conventional savings account, certificates of deposit offer higher rates of interest on the deposit value.
• Upon maturity of the CD, banks or financial institutions offer a 7-day grace period to decide what to do with the investment amount. Depositors can either withdraw the principal amount along with the interest amount or can also reinvest the amount. 

Should you invest in a certificate of deposit?

There are investors who are always looking for schemes to invest their surplus funds that have a low-risk probability and yield better returns in the short term. A certificate of deposit is a safe option for such investors. Since CDs offer a high return on investment, it is a good idea to invest money in this scheme rather than keeping the money in your savings account. Also, just like other calculators like the FD calculator or NSC calculators available online, depositors can also calculate the interest earned on CDs with the help of online calculators. However, it is recommended to do thorough research before investing any amount. Consider all the pros and cons of various investment schemes available and then make an informed decision. At the end of the day, it is your hard-earned money, and you want to get the maximum benefit possible.