What Is Certificate Of Deposits: Definition, Rates, Features & Advantages

09^th Apr 2024...

Everybody likes to save money and looks for ways to choose the best option which yields maximum returns. When confused about where to allocate savings for distinct financial objectives, choosing a financial instrument becomes important.

While high-yield savings and money market accounts excel for short-term goals, the strategic use of funds not needed in the near term finds a companion in Certificates of Deposit or CDs.

This financial tool presents an avenue to accumulate and earn interest on idle funds.

Getting clarity about the dynamics of certificate of deposit rates becomes essential in this financial decision-making process. This blog will talk all about CDs, helping you understand the pros and cons of a CD account and make smart financial choices.

What is a certificate of deposit?

A Certificate of Deposit, commonly known as CD, is a fixed-income financial instrument regulated by the Reserve Bank of India (RBI) and issued in a dematerialised form. This instrument, available through selected financial institutions or scheduled commercial banks (SCBs), ensures a predetermined payout.

These are issued at a discount on face value, like a fixed deposit (FD). A CD is a written acknowledgement of depositing money in a bank for a fixed period. In return, the bank commits to paying interest based on the deposited amount and duration. A CD provides a secure avenue for individuals to earn interest on their savings with a guaranteed payout.

Must Read: Insight On Savings Account Interest Rate

Features of CD

Here are the key features of a CD:

The minimum deposit for CDs in India is Rs 1 lakh, with subsequent multiples.
Eligible issuers are SCBs and selected financial institutions as allowed by RBI within the limit.
Term periods: SCBs issue CDs for three months to a year, while financial institutions offer 1–3 years terms.
CDs in dematerialised forms are transferable through endorsement or delivery, akin to dematerialised securities.
No mandatory lock-in period for CDs, providing flexibility to depositors.
Issuing a loan against a CD is not permitted.
CDs are fully taxable under the Income Tax Act.
CDs cannot be publicly traded.
Banks are restricted from repurchasing a CD before its maturity date, ensuring stability.

Benefits of CD

1. Security:

CD or FD ensures the safety of your capital, shielding it from market volatility. This financial instrument guarantees a predetermined sum at maturity, akin to conventional insurance. It offers a secure short to mid-term investment, where your invested money steadily increases without the risk of loss.

2. High-Interest Rate:

The primary allure of CDs lies in their ability to provide higher interest rates. CDs surpass the interest rates traditional savings accounts offer. This feature makes CDs an attractive choice for investors seeking substantial returns.

Must Read: Avail High Interest Rates on Savings Account?

3. Flexibility:

CDs grant investors flexibility in choosing payout options. Investors can tailor the CD to meet their specific needs, whether for monthly or annual payouts or a lump sum withdrawal at maturity. While the duration and investment amount must align with the bank's parameters, this customisation ensures maximum benefits for the investor.

4. Low to Minimum Maintenance Costs:

CDs incur minimal maintenance costs, unlike market-related brokerage costs associated with buying and selling shares. Many banks only charge based on the invested amount, eliminating additional expenses. This cost-effectiveness adds to the appeal of CDs as a straightforward and economical investment choice.

Cons of CD

1. Accessibility:

Compared to flexible savings accounts, CDs restrict access until maturity, making them less suitable for emergency funds.

2. Early Withdrawal Penalties:

CD withdrawals before maturity often incur penalties, diminishing the benefits of using them for savings.

3. Interest Rate Risk:

CD returns depend on interest rates, presenting a risk if rates decline without a flexible CD option.

4. Inflation Risk:

In a low-interest environment, inflation can outpace CD returns, reducing the actual value of savings over time.

5. Lower Returns:

While offering stability, CDs yield lower returns than riskier investments like stocks or mutual funds. Investors seeking higher returns may explore alternative options with associated risks.

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Kotak ActivMoney is an auto sweep facility that lets your money work for you by earning FD-like interest on your idle funds. It gives you the flexibility to access your funds anytime without any penalty. With this facility, the excess amount in your savings bank account, above a predetermined threshold, is automatically transferred into a fixed deposit so you can earn higher interest.

Conclusion

Investing in a CD offers a secure avenue for short to medium-term financial growth. This guide has clarified these income instruments' qualifications, characteristics, and advantages, emphasising their significance in safeguarding financial well-being.

As you step forward on your CD journey, knowing about interest rates offered by a Kotak 811 Edge account is essential. The Kotak811 account opening process is simple, requiring a few easy steps. With your 811 savings account, you're well-positioned to enjoy FD-like interest on your deposit and take significant steps toward securing your financial stability.

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This Article is for information purposes only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empanelled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees, and contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.