A Certificate of Deposit or a CD is a savings certificate that entitles the bearer of the same to receive interest. The certificate bears a maturity date, has a fixed rate of interest, and is issued in any denomination. The CD’s are generally issued by commercial banks and the tenure ranges from three months to five years. In case, you have some extra money you can invest the same in CD even for relatively short period of time. CD’s are safe investments that are generally suitable for cash amounts that you do not need for long periods. The returns on CD’s are guaranteed, that means you are assured of getting your full invested amount in addition to the interest amount that the bank will pay you for your investment.
Advantages of CD
Term of investment
The major advantage of using a CD is that you can chose the tenure for investment in CD from 3 months to five years. The longer the term of CD, the greater is the amount of interest that you receive for your investment.
The advantage of investment in a CD is the grace period that is granted by the Bank. Grace period is the period granted by the bank to decide your plans of further investment of the matured amount. The grace period is generally of seven days.
Fixed Rate of interest
The CDs are the safest investments as the rate of interest is almost fixed and does not change for the entire tenure of the CD. So you need not worry about the floating rate of interest. CDs are also beneficial as they pay a higher rate of interest than the savings account
While investing money, investors look out for option that offers lower risk. CDs offer investors the option of investing at lower risks. If you have some money and you are planning not to use that money for some time, you are advised to invest that money in certificate of deposit.
More rate of interest than savings account
The rate of interest offered by CDs is more than the traditional savings account. During tough economic times, it is easier to invest in certificate of deposits as the interest on CDs is earned at fixed rate.
Promotes safe investment by Banks
CDs are less risky as compared to traditional investments like mutual funds and annuities. They are linked to stock market and hence do not guarantee any fixed returns. When you invest in CDs, the banks issuing the CDs will further invest this amount into safe investments that will promote and generate growth. Thus the money is used wisely for investments.
One size fits ALL
CDs are used by individuals from low income group as well as individuals from high income group. This helps the banks to get them a steady business by offering CDs and is a win-win situation for both the banks and the investors. Also no middle agent is required for purchasing a CD. The investors can directly contact the bank for their investment in CD.
The major disadvantage of investing in CD is that once you invest in a CD, you cannot withdraw your money before your term matures. In case you do so, the bank charges a penalty for the same.
The other biggest disadvantage is that in case you do not decide about what you have to do with your matured funds, the bank will automatically renew the same at prevailing interest rate which may sometime be much lesser as compared to other investment options.
The other disadvantage if that the owner cannot easily liquidate the CD in case of emergency. They are usually charged a penalty for premature withdrawal which may result in loss of interest.
The interest rate on CDs does not increase with inflation and thus your time value of money will decrease with increasing inflation.