What is a Certificate of Deposit: Rates, Features & How it Works?

Here are some of the salient features of the Certificate of Deposit that you can consider while opening an account:

• Tenure: Several financial institutions offer tenure between three to five years. On the contrary, Scheduled Commercial Banks usually offer a term between three months and a year that you can choose at your convenience.

• Tax: CDs are usually entirely taxable under the Income Tax Act. So, you should contribute to this financial instrument considering the tax component you will have to bear.

• Limits: The minimum amount you will have to put in this fund is ₹1 Lakh. In addition to this, you can also deposit in multiples of this amount to generate increased returns.

• Transfer: You can easily transfer a CD that you hold in demat form with strict adherence to the demat security guidelines. However, you are not permitted to transfer a CD not present in electronic form.

• Loan: You cannot opt for a loan against CD under normal circumstances. However, if an investor needs funds, they can take permission from RBI. Nonetheless, they will have to buy back those CDs before maturity. 

• Discount: Many banks offer a discount on the face values of the CDs. Also, you can purchase a CD on a floating rate basis. However, you should remember that the floating rate of the CD is usually market-based. 

• Interest Rates: The interest rate on CDs is usually 7.8%. This ensures generous returns from CDs that do not involve the risk of losses. Hence, you can receive calculated returns from your investments. 

These above features can influence you to invest a portion of your savings in a certificate of deposit. Apart from this, you get several benefits from opening a CD account. 

A CD account can benefit you in numerous ways. Here are some reasons why you can consider putting money in this account:

• Generous Return on Investment: CDs usually offer an interest of 7.8%, sufficient for wealth creation at the estimated speed. Also, you will not have to pay extra as a brokerage which can save a lot of money.

• Risk-Free Investment Options: Have a low-risk appetite? Then CDs serve as a perfect investment option for you. The returns from CDs are not dependent on market fluctuations, allowing you to calculate the returns beforehand.

• Simple Transaction Process: The process of buying and selling CDs is somewhat similar to those of shares. This is beneficial as you will not have to learn a new process separately to continue trading. 

• Minimal Eligibility Criteria Associated: Wondering if you are eligible to make investments in a certificate of deposits? The eligibility criteria are simple so that investors can easily fulfil them to start their investment journey.

• Several Discounts Available: Several banks offer amazing discounts on the face value of CDs. This allows you to save more on your investments and generate sufficient returns. 

• Flexibility of Selecting Payout Option: You can select a convenient monthly payout option to get additional funds. You can use this to pay your EMIs or level up your lifestyle. 

Buying and selling CDs is somewhat similar to that of shares. You can follow the steps below to proceed with your transaction:

Step 1: The buyer and the seller will agree on the quantity and price involved in the transaction.

Step 2: The seller must authorise the delivery instructions slip containing details about debiting the seller's account and transferring the CD to the buyer’s account.

However, before proceeding with your investments, you should know about the advantages and disadvantages of a certificate of deposit. This will help you in making wise decisions. 

Here are some notable advantages that you can reap by putting your money in a certificate of deposits:

• Safe from Market Volatility: The returns from your investment are not dependent on market volatility. Hence, there is no risk of financial losses associated with these investments. Also, you can expect assured returns on depositing money in these monetary instruments and plan your financial goals accordingly.

• Flexibility in Payout Option: You can select the payout type from these investments at your convenience. This usually includes monthly payouts, annual payouts, or a lump sum withdrawal. Furthermore, you can select tenure and deposit amounts at your convenience. 

• High Returns on Investments: Investors are eligible to receive high returns of up to 7.8% on their deposits compared to traditional savings accounts. This allows them to build wealth rapidly to earn a substantial amount and fulfil their financial goals as early as possible. 

• Minimal Maintenance Charges: In CDs, you will not have to pay any additional money to brokers for buying, selling, and delivering shares. Most of the time, you will not have to pay extra money to maintain CDs. This ensures increased savings on additional costs.

However, apart from the benefit of a certificate of deposit, several downsides are associated with these investments. These usually include:

• Penalisation on Premature Withdrawal: you will have to pay a penalty fee in case of withdrawing money from your CD account before they mature.

• Do Not Provide a Hedge Against Inflation: Certificate of deposits do not hedge against inflation when the price of goods and services increases.

• Liquidity is Lesser than Other Investment Options: These options do not allow investors to withdraw funds at their convenience, reducing the availability of funds. 

Once your CD account matures, you will get a grace period of up to ten days. Within this time, you can withdraw the investment or roll it over to a new CD. So, if you do not have immediate fund needs, you can roll it over to a new account. 

What will happen if you forget to withdraw money within those ten days? Your bank will automatically roll it over to a new CD. This will restrict your access to the new account. Also, if you need funds in an emergency and want to pull out some of your invested amount, you might have to pay a penalty.

In case of premature withdrawal of CDs, you will have to pay a penalty. This amount usually varies from one bank to another. Furthermore, the penalty is usually a period's worth of interest, depending on the tenure of your investments. So, it would be prudent to pull out money from these deposits only when you really need funds.

We hope that now you have a clear idea about what a certificate of deposit is and how you can invest in them for maximum returns. This will help you to make the most out of your deposits. So start your investment journey today!