Investment word of the day: A Certificate of Deposit (CD) is a financial instrument administered by the Reserve Bank of India, where interest is earned on an amount deposited for a specific time period. These short-term investment instruments are typically considered secure because the deposited amount is not subject to market volatility.
Who issues a CD?
CDs are issued by scheduled commercial banks and financial institutions. However, cooperative banks and regional rural banks are not eligible to issue CDs.
Maturity tenure
The maturity tenure of a certificate of deposit issued by a commercial bank ranges from 7 days to 1 year, while for other financial institutions, the maturity period is from 1 year to 3 years. Depositors cannot withdraw the deposited amount before the due date, and a penalty is levied if they plan to do so.
Minimum amount
The minimum investment amount required for a Certificate of Deposit is ₹1 lakh and its multiples.
Certificate of deposit — an illustration
Here is an example of how a CD works —
Suppose you have invested ₹1,00,000 in a CD with an interest rate of 5 per cent per annum for one year. By the end of the specified period, you will receive an interest of ₹5,000 along with your deposit amount, which totals to ₹1,05,000.
Are certificates of deposit the same as fixed deposits?
Fixed Deposits (FDs) and Certificates of Deposits (CDs) are savings schemes offered by banks that help investors to deposit money and earn interest on it. Both FDs and CDs function in a similar way. However, some of the major differences between the two are the investment period and amount. CDs relatively offer shorter investment periods, while the maturity tenure of FDs is longer.
The minimum investment amount required in a CD is ₹1 lakh. FDs typically provide higher flexibility, allowing investors to deposit as much as ₹1,000.
A loan cannot be issued against a CD, while you can apply for a loan against an FD.
Disclaimer: This article is for informational purposes only and does not constitute financial advice; please consult a qualified financial advisor before making any financial decisions.
