CERTIFICATE OF DEPOSIT
The CD commonly known as Certificate of Deposit was introduced in the year 1989 in India to increase the range of money market instruments. It is an agreement between an authorities bank or financial institution and a depositor. Depositors invest a specific amount for a pre-decided time period and the financial institution or banks pays interest on it. These depositors can be anyone including individual investors, companies, or corporations. This instrument is issued as a promissory note by the respective financial institution or bank.
In this article, we are going to throw some light on the significant aspect of Certificate of Deposits i.e. CDs.
FEATURES OF CERTIFICATE OF DEPOSIT
1. Issued by certified entities:
A selective list of financial institutions and commercial banks has been authorized by the RBI to issue CDs. Cooperative banks or rural banks are not eligible to issue CDs.
2. Who can deposit:
Companies, corporations, along with individual investors, are eligible to purchase CDs. NRIs can also be issued this on a non-repatriable basis.
3. Minimum deposit:
The minimum sum that can be deposited in a CD is Rs. 1 lakh.
Electronically generated or Dematerialised certificates can be transferred by endorsement or delivery, while those in Demat forms can be transferred as per the guidelines set for securities.
5. Loan facility:
Authorized financial institutions and banks cannot grant loans to depositors against certificates of Deposits as these are not accompanied by a lock-in period.
The tenure for CDs issued by commercial banks varies from seven days to one year. The maturity period for CDs issued by authorized financial institutions varies between 1 to 3 years.
BENEFITS OF CERTIFICATE OF DEPOSIT
1. Fixed Returns:
The rate is pre-determined throughout the investment period and hence they offer better returns when compared to a bank savings account. Staying invested for a longer period will also result in better returns. Hence, financial institutions issue CDs with different maturity periods like 1 to 3 years.
This instrument is comparatively safer than other investments which are linked to the vulnerability and volatility of the market like stocks and bonds.
There is an extensive list of authorized financial institutions and banks that have been authorized by RBI to sell CDs. Therefore, investors can select the one that meets their needs and investment objectives the best.
4. Grace period:
On maturity, depositors get a grace period of seven days which helps them decide about their maturity amount. One can continue to withdraw or reinvest the same.
HOW TO CHOOSE AN IDEAL CERTIFICATE OF DEPOSITS?
1. Well aware of tenure:
Investors must be well aware of the tenure for which they want to invest in CD while taking note that this amount can’t be retrieved during this tenure.
2. Change in rates:
The banks renew interest rates regularly. Also, the interest rate of CDs is not dependent on inflation. However, the actual cost may decrease with the increasing inflation rate.
3. Limited liquidity:
As the amount cannot be withdrawn before maturity, this instrument comes with a liquidity constraint.
HOW TO CALCULATE YOUR INCOME ON CD?
1. Discount on Face Value:
The concerned financial institution or bank has the autonomy to decide on the coupon rate, also known as the discount rate.
2. On the basis of a floating rate:
The process of calculating the floating rate is a market-based benchmark to ensure transparency. The rate of interest on floating rate CD varies from time to time in India.