A Guide to Certificate of Deposit (CD) Investments

Introduction

The earlier generation of retail investors had their financial assets base spread across FDs, real estate, gold, EPF, PPF, Post Office schemes, etc. Nowadays, thanks to technology and financial awareness, the current cohort of retail investors have diversified their financial portfolios to include MFs, equities, commodities, bonds, insurance, ULIPs, etc. With this diversification, even the risk appetite has considerably changed. Nowadays, one doesn’t even hesitate before investing in ‘new-age structured products’ touted as fixed income or even cryptocurrencies. How times have changed! However, certain things remain constant; irrespective of the asset class, the principles of financial planning are time-tested. Ultimately, all these financial assets share a common goal: to service either long-term or short-term financial objectives.

When it comes to long-term goals, we meticulously plan for expenses like marriage, kid’s education in advance, creating individual buckets for each goal and allocating funds accordingly. But what about short-term goals or emergencies? Do we allocate funds for those as well? According to a survey titled “India’s Money Habits” by the personal finance platform Finology, “75% of Indians do not have emergency funds and could default on their equated monthly installments (EMIs) in the event of a sudden layoff.”

Our long-term goals are supported by SIPs and savings in FDs. But what about short-term goals? Don’t worry! In this article, we’ll dive into an often-overlooked instrument: Certificate of Deposit (CD) that may be a useful tool for short-term goals. Despite FDs dominating the spotlight, both are offered by banks. CDs provide a safe and convenient option for investors looking to add a fixed-income element to their portfolios. Let’s explore CDs further.

What are Certificate of Deposits?

According to RBI, certificate of deposits are defined as negotiable, unsecured money market instruments issued by banks in the form of a Usance Promissory Note against funds deposited for a specified period. CDs are essentially a type of time deposit offered by banks and financial institutions in India. (Source: RBI)

In contrast to conventional time deposits, Certificates of Deposit (CDs) serve as freely transferable assets, commonly known as Negotiable Certificate of Deposits. These were introduced in India back in 1989 with the objective of diversifying the spectrum of money market instruments and offering investors increased versatility in allocating their short-term excess funds. When you invest in a CD, you deposit a fixed amount of money for a predetermined period and in return, the issuer pays you a fixed interest rate. At maturity, you will be reimbursed with your initial investment amount. CDs do not have a lock-in period and can be held in demat form as well. CDs may also be issued at a discount to face value or on a floating rate basis, depending on the banks’ requirements.

Features of Certificates of Deposits

• Scheduled commercial banks and financial institutions have the authority to issue CDs. Regional Rural Banks (RRBs) and cooperative banks are ineligible for CD issuance.
• CDs can be issued to a variety of entities, including individuals, corporations, banks, PDs, trusts, funds, associations and more.
• NRIs are allowed to participate in CD subscriptions on a non-repatriable basis, subject to the condition explicitly mentioned on the Certificate. It’s important to note that these CDs cannot be transferred to another NRI within the secondary market.
• The minimum denomination of a CD is Rs. 1 lakh and can be issued in multiples of Rs. 1 lakh.
• Upon maturity of CDs, investors are granted a grace period of 7 days, enabling them to make decisions regarding their maturity proceeds. They have the option to reinvest or withdraw the funds during this period.
• CDs cannot be used as collateral and banks can’t buy back their own CDs before maturity.
• CDs offer flexibility with terms ranging from as short as 7 days to as long as 1 year, allowing you to align your investment horizon with your financial goals.
• FIs can issue CDs with different maturity periods, i.e., from 1-year to a 3-year CD.

Advantages of investing in Certificate of Deposits

Safety and Predictability: CDs provide safety, guaranteeing your principal and interest at maturity.

Competitive Returns: Compared to traditional savings accounts, CDs generally offer higher interest rates.

Liquidity at Maturity: Your funds become readily available at the maturity of the CD, catering to foreseeable spending needs.

Easy to Invest: The process of investing in CDs is streamlined and accessible at most banks.

Certificate of Deposits are an excellent fit for

Risk-Averse Investors: Those seeking capital preservation and predictable returns can benefit from CDs.

Investors with Specific Time Horizons: CDs align well with investors who need funds available on a specific future date.

Investors Seeking Diversification: CDs complement a portfolio by adding a low-risk, fixed-income element.

Conclusion

For investors venturing into the Indian debt market and looking to fulfill short term goals, CDs offer a compelling combination of safety, predictability and competitive returns. If you’re seeking a low-risk option with liquidity needs at a predetermined date, CDs are well worth considering. Remember it’s essential to compare offerings from various banks and FIs, along with their terms and interest rates to make an informed decision that fits your specific investment goals.

FAQs

Q. What is the difference between a certificate of deposit and a fixed deposit?

A. Although banks offer both certificates of deposit and fixed deposit, a primary distinction lies in transferability: CDs are transferable, unlike FDs which do not offer transferability. For FDs, the minimum investment amount is Rs. 1000, whereas for CDs, it is Rs. 1 lakh. FDs are available for both short and long terms, while CDs are primarily intended for short-term use. Additionally, loans can be availed against FDs but not CDs.

Q. Are certificate of deposits (CDs) safe investments?

A. Yes, CDs are generally considered safe investments as they are issued by banks and financial institutions. However, it’s essential to ensure that the issuing bank is reputable and financially stable.

Q. Can I withdraw my investment from a certificate of deposit (CD) before maturity?

A. A. While CDs are typically designed to be held until maturity, some banks may offer early withdrawal options with a penalty. However, this varies depending on the bank and the terms of the CD. It’s essential to check the terms and conditions before investing.

Disclaimer: Investments in debt securities/ municipal debt securities/ securitised debt instruments are subject to risks including delay and/ or default in payment. Read all the offer related documents carefully.