Certificate of Deposit (CD)

Certificate of Deposit (CD)

Definition 

A Certificate of Deposit (CD) is a financial product issued by banks and credit unions that allows customers to deposit monies for a set length of time at a fixed interest rate.

Description

Certificate of Deposit meaning is a financial instrument that shields your capital asset from market volatility. 

Creating a CD is identical to creating a conventional bank deposit account. The distinction is what you consent to when you sign on the dotted line (even though that signature is now digital). After you've looked around and decided which CD(s) to open, completing the process will lock you into four options.

1. The interest rate: While most CDs have a fixed interest rate, variable-rate CDs may allow you to receive a more significant return if interest rates rise. A fixed-rate CD tells you exactly how much you'll earn at the end of the term, but it could cost you if interest rates climb after you've locked in.
2. The term is when you agree to leave your funds deposited to avoid any penalty (such as 6-month CDs, 1-year CDs, 18-month CDs, etc.). The period ends when your CD matures, and you can withdraw your cash without penalty.
3. The primary is the amount you agree to deposit when you open the CD, except for some specialty CDs.
4. The Institution: The bank or credit union where you open your CD will set the terms of the arrangement, such as early withdrawal penalties (EWPs) and whether your CD will be automatically reinvested if you do not provide further instructions at maturity.

Once your CD is established and funded, the bank or credit union will administer it in the same way that most other deposit accounts are, with monthly or quarterly statement periods, paper or electronic statements, and usually monthly or quarterly interest payments deposited to your CD balance, where the interest compounded.

Advantages of Certification of Deposit
 

These are the advantages of Certification of Deposit

• CDs are government-backed securities; therefore, the investor's principal is safe. As a result, they are a lower-risk investing alternative to equities and bonds.
• Certificates of Deposit pay a higher interest rate and yield better returns than typical savings accounts.
• CD investments provide investors with a 7-day grace time to determine whether or not to reinvest the matured sum.

How to Choose which Certificate of Deposit to Invest in?

This is how you can choose Certificate of Deposit to invest in:
 

• Before investing in a CD, you must be clear about your investment goals and your investment horizon.
• Once you are sure of the period you wish to stay invested for, look for the banks/institutions that offer certificates of deposit.
• Go through the rates of interest offered by these institutions within the specified time frame.
• If the interest rate is expected to rise, consider investing for a shorter period to renew it at a higher rate. Even if the interest rate does not increase, your invested money will still be safe from unnecessary fluctuations.

Things to consider before buying Certificates of Deposit

Some of the things to consider when buying Certificates of Deposit

• Duration of the CD- The maturity time of the Certificate of Deposit is one of the most important factors influencing interest rates. The interest rate increases with the length of the maturity period.
• Current Rate of Interest- Because the Reserve Bank of India overseas certificates of deposit, interest rates fluctuate over time. As a result, it is recommended that you monitor developments on a frequent basis.
• Expected Rate of Returns- Before investing in a CD, you should track the historical returns produced by various banks and then make a prudent and educated decision.
• Limited Liquidity- When investing in a CD, the investor should select how long they wish to stay involved. If the investor decides to withdraw the funds before maturity, he or she will have to pay a penalty.
• Fluctuating interest rates- Banks renew CD interest rates at regular periods, regardless of inflation. As a result, as inflation rises, the value of money may fall while the investor remains invested.
• Investment horizon- The rate of interest that an investor earns on his or her CD investment is determined by how long he or she stays invested. The longer the period of investment, the higher the interest rate offered.

Example
 

One example of a Certificate of Deposit (CD) offered by an Indian bank is the "Fixed Deposit" scheme provided by the State Bank of India (SBI). SBI's Fixed Deposit allows customers to deposit a certain amount for a fixed period at a predetermined interest rate. 

Customers must refrain from withdrawing the funds before the maturity date without incurring penalties. SBI's Fixed Deposit is a popular investment option among Indian savers seeking a secure way to earn interest on their savings.

FAQ
 

What are the types of Certificates of Deposit?

There are several CDs, including regular CDs with set interest rates and periods, bump-up CDs that allow for a one-time interest rate rise, liquid CDs that allow for early withdrawals with penalties, and callable CDs, which the bank can redeem before maturity.

Who issues a Certificate of Deposit?

Banks and credit unions issue certificates of deposit. These financial organisations provide CDs to individuals, allowing them to earn interest on their savings while keeping their money safe.

How to buy or sell certificates of deposit in India?

Purchasing or selling a dematerialized certificate of deposit is analogous to purchasing or selling shares. These are the steps to buy or sell certificates of deposit in India:

• Sellers and buyers begin by agreeing on the price and quality of the transaction.
• Following this, the seller approves its depository participants (DPs) via delivery instructions slip.
• The slip includes instructions for debiting the seller's account and transferring the Certificate of Deposit to the buyer's account.
• If there is any confusion, a professional can be contacted for more guidance.

Is it possible to transfer money between my online CD and other accounts?

Yes it is possible to transfer money between your online CD and other accounts. You can make a one-time transfer from your Online CD to another account during the grace period. 

The Grace Period is a set amount of time offered to investors for transferring/one-time depositing, withdrawing, or renewing an Online CD. The grace period ends on the day you complete the purchase or give instructions to amend the terms.

Is my Online CD automatically renewed at maturity?

There is a grace period after the maturity of an Online CD during which you can move or withdraw funds. If you do nothing, the bank may automatically renew the Online CD, but at a different interest rate for the next term. The renewal term could be the same as the original one.