Certificate of Deposit

What is a Certificate of Deposit?

A certificate of deposit, or CD, is a dematerialized fixed-income financial instrument issued by the Reserve Bank of India (RBI). From the start, the pay-out amount is guaranteed.
Any Scheduled Commercial Bank or All-India Financial Institution may issue a CD. They are distributed with a face value discount. Similar to a fixed deposit (FD), a certificate of deposit (CD) serves as written confirmation that you have placed money with a bank for a specific amount of time, with interest to be paid by the bank according to the amount and length of the deposit.

Difference Between CD vs FD

A certificate of deposit and a fixed deposit are similar in every way. They are the same thing. Some banks even refer to fixed deposits as time deposits or CDs. They have higher interest rates than conventional savings accounts, the same term duration, and a minimum deposit requirement. One distinction is that whereas FDs are not negotiable, CDs are.

Features of CD

Here are some key characteristics of CDs and a comparison with other financial products.
1. In India, CDs can be issued with a minimum deposit of ₹1 lakh, and in multiples of that amount as well.
2. All-India Financial Institutions and Scheduled Commercial Banks (SCBs) are permitted to issue CDs. RRBs and cooperative banks are unable to issue CDs.
3. The duration of CDs issued by SCBs ranges from three months to one year.
4. Financial institution-issued CDs have terms of one to three years.
5. Dematerialized CDs are transferable by endorsement or delivery, much as dematerialized securities.
6. With a CD, lock-in is not necessary.
7. A CD cannot be used as collateral for a loan.
8. According to the Income Tax Act, a certificate of deposit is completely taxable.
9. A CD cannot be exchanged openly.
10. A CD cannot be repurchased by a bank prior to its maturity.

Difference between CD vs Commercial Paper

A CD and commercial paper are very different from each other in two key ways. Who can issue them is the first. Banks and financial entities issue CDs. Main dealers, big businesses, and All-India Financial Institutions issue commercial papers. The minimum deposit amount is the second distinction. A certificate of deposit can have multiples of it after requiring a minimum investment of ₹1 lakh. Conversely, a commercial paper is only issued for investments totalling ₹5 lakh or more, and even then, only in multiples of ₹5 lakhs.

When Do Banks Issue a CD in India?

Any scheduled commercial bank can have high-risk liabilities in the form of CDs. Certain banks are more likely than others to offer a CD at particular periods. It comes down to two main things:
When there is a strong credit demand combined with slow deposit growth.
When the market's liquidity conditions are rigid or tight, indicating that cash is invested in non-liquid assets. After the sum in their CD has matured, NRIs who have invested are not allowed to return home.

How to Buy a Certificate of Deposit?

Purchasing and selling CDs follows a similar procedure to that of purchasing and selling shares, and the processes are as follows:
1. Both the buyer and the seller must concur on the transaction's quality and pricing.
2. The distribution instructions slip will be used by the seller to authorize its depository participants.
3. The instructions to debit the seller's account and transfer the CD to the buyer's account will be included on the slip.
4. You can also seek expert advice if you're still unclear.

Advantages of Issuing CD in India

CD Issuing a CD has advantages, which is why so many investors choose to do so. They are as follows:

Security: Market volatility won't cause a certificate of deposit, or FD, to devour your wealth. Like traditional insurance, it's a totally safe financial product with an assured amount at maturity. There is no danger of loss and the money you invest in your CD will grow steadily over time. It's a fairly safe investment for the short to medium term.

High-Interest Rate: The majority of investors are drawn to CDs because of this feature. Compared to regular savings accounts, which have interest rates that typically hover around 4%, they provide higher rates of interest, which may reach as high as 7.8% on the lump sum deposited.

Flexibility: When it comes to your CD, you have the option of receiving monthly, yearly, or lump sum dividends when it matures. You are free to choose the investment period and amount, but it must adhere to certain restrictions imposed by the bank. You may maximize the benefits of the CD by customizing it to meet your needs.

Low to Minimal Maintenance Costs: There are always brokerage fees associated with the market for the delivery, purchase, and sale of shares. With a CD, there are typically no additional expenses. With certain institutions, you only pay what you invest.

In summary, issuing certificates of deposit is a safe way to make short- to medium-term investments. With any luck, this CD guide has helped you understand the characteristics, eligibility requirements, advantages, and benefits of fixed income products like CDs—as well as why investing on them is a wise financial move for your future.

However, you would first need to register a Demat account before you could proceed with your CD. A dematerialized account is referred to as a "demat account." Holding dematerialized securities, such as a CD, requires an online Demat account. In just a few quick and simple steps, you may start a Demat account and get your first CD.