Certificate of Deposit or CD is a fixed-income financial instrument governed under the Reserve Bank of India issued in a dematerialized form where the amount at withdrawal is assured from the beginning.
A CD can be issued by any All-India Financial Institution or Scheduled Commercial Bank. They are issued at a discount provided at face value. Like a fixed deposit (FD), a CD’s purpose is to denote in writing that you have deposited money in a bank for a fixed period and that bank will pay you interest on it based on the amount and duration of your deposit.
Features of Certificate of Deposit
Before you invest in a Certificate of Deposit, you must be entirely aware of what this money market instrument is all about-
- Eligibility: Not all institutions or banks can issue Certificates of Deposit, and not every individual or organization can purchase one. There are specific guidelines laid down by the RBI that allow the purchase of CDs
- Maturity Period: A Certificate of Deposit issued by the commercial banks can have a maturity period ranging from 7 days to 1 year. For financial institutions, it varies from 1 year to 3 years
- Minimum investment amount– A CD can be issued to a single issuer for a minimum of Rs.1 Lakh, and its multiples
- Transferability: Certificates available in Demat forms must be transferred according to the guidelines followed by Demat securities. While dematerialized/electronic certificates can be shared by endorsement or delivery
- Non-availability of loans: Since these instruments do not have any lock-in period, banks do not grant loans against them. Banks cannot even buy back certificates of deposit before maturity
- Discount offered– Certificate of deposit is issued at a discounted rate on the face value. Moreover, banks and financial institutions can also issue CDs on a floating rate basis
Why would I open a CD?
Unlike most other investments, certificates of deposit offer fixed, safe—and generally federally insured—interest rates that can often be higher than the rates paid by many bank accounts. And CD rates are usually higher if you’re willing to sock your money away for more extended periods.
CDs have become a more attractive option for savers who want to earn more than most savings, checking, or money market accounts pay, but without taking on the risk or volatility of the market.
How does a certificate of deposit work?
When a depositor purchases a certificate of deposit, they agree to leave a certain amount of money on deposit at the bank for a certain period, such as one year. In exchange, the bank agrees to pay them a predetermined interest rate and guarantees the repayment of their principal at the end of the term.
Comparison Between Bajaj Finance FD Vs. Certificate of Deposit.
- A CD does not offer a loan facility, but Bajaj Finance FD offers.
- CDs are limited to a tenor of one year only, whereas Bajaj Finance FDs are available for 12-60 months, thus, more flexible than CDs.
- It would help if you had Rs. Five lakh to open a CD account. On the other hand, you can start a fixed deposit with Bajaj Finance with Rs. 25,000 only.
Regulated by the Reserve Bank of India, a Certificate of Deposit is a type of money market instrument issued against the funds deposited by an investor with a bank in a dematerialized form for a specific time. A certificate of deposit in the money market is a negotiable option where you can invest in multiples of Rs. 5 lakh for the short term to earn a fixed income at a pre-specified interest rate. For certificate of deposit vs fixed deposit, investors prefer fixed deposits when it comes to flexibility regarding the investment amount.