A Guide to Certificate of Deposit (CD) Investments

Introduction

The earlier generation of retail investors had their financial assets base spread across FDs, real estate, gold, EPF, PPF, Post Office schemes, etc. Nowadays, thanks to technology and financial awareness, the current cohort of retail investors have diversified their financial portfolios to include MFs, equities, commodities, bonds, insurance, ULIPs, etc. With this diversification, even the risk appetite has considerably changed. Nowadays, one doesn’t even hesitate before investing in ‘new-age structured products’ touted as fixed income or even cryptocurrencies. How times have changed! However, certain things remain constant; irrespective of the asset class, the principles of financial planning are time-tested. Ultimately, all these financial assets share a common goal: to service either long-term or short-term financial objectives.

When it comes to long-term goals, we meticulously plan for expenses like marriage, kid’s education in advance, creating individual buckets for each goal and allocating funds accordingly. But what about short-term goals or emergencies? Do we allocate funds for those as well? According to a survey titled “India’s Money Habits” by the personal finance platform Finology, “75% of Indians do not have emergency funds and could default on their equated monthly installments (EMIs) in the event of a sudden layoff.”

Our long-term goals are supported by SIPs and savings in FDs. But what about short-term goals? Don’t worry! In this article, we’ll dive into an often-overlooked instrument: Certificate of Deposit (CD) that may be a useful tool for short-term goals. Despite FDs dominating the spotlight, both are offered by banks. CDs provide a safe and convenient option for investors looking to add a fixed-income element to their portfolios. Let’s explore CDs further.

What are Certificate of Deposits?

According to RBI, certificate of deposits are defined as negotiable, unsecured money market instruments issued by banks in the form of a Usance Promissory Note against funds deposited for a specified period. CDs are essentially a type of time deposit offered by banks and financial institutions in India. (Source: RBI)

In contrast to conventional time deposits, Certificates of Deposit (CDs) serve as freely transferable assets, commonly known as Negotiable Certificate of Deposits. These were introduced in India back in 1989 with the objective of diversifying the spectrum of money market instruments and offering investors increased versatility in allocating their short-term excess funds. When you invest in a CD, you deposit a fixed amount of money for a predetermined period and in return, the issuer pays you a fixed interest rate. At maturity, you will be reimbursed with your initial investment amount. CDs do not have a lock-in period and can be held in demat form as well. CDs may also be issued at a discount to face value or on a floating rate basis, depending on the banks’ requirements.

Purpose of Certificate of Deposit

The primary purpose of a Certificate of Deposit (CD) is to offer investors a low-risk avenue to earn fixed returns over a predetermined period. It serves as a short-term money market instrument that helps individuals, institutions, and corporates park surplus funds safely while earning assured interest. For risk-averse investors or those looking to diversify from traditional savings accounts, CDs offer a secure and predictable option. They also help banks and financial institutions manage liquidity and fund short-term credit requirements. In essence, CDs benefit both the issuer and the investor by balancing safety, returns, and short-term flexibility.

Who Issues Certificate of Deposit?

Certificates of Deposit in India are primarily issued by scheduled commercial banks (excluding Regional Rural Banks) and select financial institutions like IDBI Bank and EXIM Bank. These issuers use CDs as a tool to raise short-term funds from the market, generally ranging from a few weeks to up to one year. Being regulated by the Reserve Bank of India (RBI), these issuances follow strict guidelines on denominations, tenures, and transferability, ensuring transparency and safety for investors. Only entities permitted by the RBI can issue CDs, adding a layer of regulatory oversight that enhances trust.

Features of Certificates of Deposits

• Scheduled commercial banks and financial institutions have the authority to issue CDs. Regional Rural Banks (RRBs) and cooperative banks are ineligible for CD issuance.
• CDs can be issued to a variety of entities, including individuals, corporations, banks, PDs, trusts, funds, associations and more.
• NRIs are allowed to participate in CD subscriptions on a non-repatriable basis, subject to the condition explicitly mentioned on the Certificate. It’s important to note that these CDs cannot be transferred to another NRI within the secondary market.
• The minimum denomination of a CD is Rs. 1 lakh and can be issued in multiples of Rs. 1 lakh.
• Upon maturity of CDs, investors are granted a grace period of 7 days, enabling them to make decisions regarding their maturity proceeds. They have the option to reinvest or withdraw the funds during this period.
• CDs cannot be used as collateral and banks can’t buy back their own CDs before maturity.
• CDs offer flexibility with terms ranging from as short as 7 days to as long as 1 year, allowing you to align your investment horizon with your financial goals.
• FIs can issue CDs with different maturity periods, i.e., from 1-year to a 3-year CD.

How Certificates of Deposit Work?

A Certificate of Deposit (CD) is a fixed-term, interest-bearing instrument where an investor deposits a lump sum amount with a bank or financial institution for a specific tenure, usually ranging from 7 days to one year. Unlike a savings account, the funds in a CD are locked in for the agreed period, and premature withdrawals may attract penalties.

Here’s how it typically works:

• Investment: You invest a fixed sum with an issuing bank or institution.
• Tenure Selection: Choose a tenure from 7 days up to 1 year (as per RBI norms).
• Interest Rate: Interest is paid either at maturity or periodically, depending on the CD structure.
• Non-Negotiability: Most CDs are non-negotiable, but some are tradable in the secondary market.
• Taxation: Interest earned is taxable as per your income slab.

Once the CD matures, you receive your initial investment along with the accrued interest. Since the returns are fixed and market-linked risk is minimal, CDs are often favoured by conservative investors looking for short-term, secure investment avenues.

Certificate of Deposit Interest Rates

The interest rates on Certificates of Deposit (CDs) are typically higher than those offered on regular savings accounts. These rates are influenced by factors such as prevailing market conditions, RBI’s monetary policy, and the issuing bank’s liquidity needs. Generally, CD interest rates in India range between 6% to 8% per annum, depending on the tenure and the issuer. The interest may be paid at maturity (discount basis) or periodically, as specified in the terms. Since CDs are issued at a discount to face value, the effective return is locked in at the time of purchase.

Certificate of Deposit Minimum Balance

The minimum investment amount for a Certificate of Deposit is regulated by the Reserve Bank of India (RBI). In India, CDs are issued in denominations of ₹5 lakh and in multiples thereof. This makes them more suitable for high-net-worth individuals (HNIs), institutions, and corporate investors. Retail investors can also access CDs through debt mutual funds or platforms that allow fractional investments. The higher minimum balance ensures that CDs are largely used for bulk, short-term funding and not as a substitute for small-ticket savings instruments.

Certificate of Deposit Maturity Period

The maturity period of a Certificate of Deposit typically ranges from 7 days to 1 year for banks and 1 year to 3 years for financial institutions, as per RBI guidelines. This flexibility allows investors to choose a tenure that aligns with their liquidity needs and return expectations. It’s important to note that premature withdrawal is not permitted for CDs, making it crucial to select a suitable maturity upfront. Upon maturity, the investor receives the face value along with accrued interest, providing a predictable return.

Certificate of Deposit Tenure

Certificate of Deposit tenure refers to the fixed period for which your money remains invested. For bank-issued CDs, the tenure ranges between 7 days and 12 months, while for financial institutions, it can extend up to 3 years. The chosen tenure affects the interest rate, with longer durations usually offering slightly better returns. However, since premature withdrawal is not allowed, investors must match the CD’s tenure with their cash flow requirements to avoid liquidity issues during the lock-in period.

How to Buy a Certificate of Deposit?

Buying a Certificate of Deposit is a simple process. CDs can be purchased directly through scheduled commercial banks or designated financial institutions. Institutional and high-net-worth individuals usually invest via direct placements. For retail investors, accessing CDs through secondary markets or debt mutual funds is a more feasible option. Nowadays, online bond platforms have also made it easier to explore available CDs and invest digitally. It’s crucial to compare rates, issuer credibility, and maturity before committing to a purchase.

Certificate of Deposit Example

Let’s say you invest ₹10 lakh in a Certificate of Deposit for 6 months at an annual interest rate of 7.5%. The CD is issued at a discounted price—say, ₹9,650 per ₹10,000 face value. At the end of the tenure, you’ll receive the full face value of ₹10 lakh, resulting in an interest income of ₹35,000 (approx). This return is predetermined and not affected by market volatility, which makes CDs attractive for conservative investors seeking safety and fixed returns.

Benefits of Certificate of Deposits

Safety and Predictability: CDs provide safety, guaranteeing your principal and interest at maturity.

Competitive Returns: Compared to traditional savings accounts, CDs generally offer higher interest rates.

Liquidity at Maturity: Your funds become readily available at the maturity of the CD, catering to foreseeable spending needs.

Easy to Invest: The process of investing in CDs is streamlined and accessible at most banks.

Certificate of Deposit Risk and Return

Certificates of Deposit (CDs) offer a fixed return, making them a low-risk investment option for conservative investors. Since they are issued by regulated banks and financial institutions, the credit risk is minimal—especially when investing in CDs from top-rated entities. However, they are not entirely risk-free. CDs are sensitive to interest rate movements; locking into a CD when rates are low can mean opportunity loss if rates rise later. Also, since premature withdrawal is not allowed, liquidity risk exists. Despite this, CDs offer predictable returns and capital preservation, ideal for short-term financial goals.

Certificate of Deposits are an excellent fit for

Risk-Averse Investors: Those seeking capital preservation and predictable returns can benefit from CDs.

Investors with Specific Time Horizons: CDs align well with investors who need funds available on a specific future date.

Investors Seeking Diversification: CDs complement a portfolio by adding a low-risk, fixed-income element.

Conclusion

For investors venturing into the Indian debt market and looking to fulfill short term goals, CDs offer a compelling combination of safety, predictability and competitive returns. If you’re seeking a low-risk option with liquidity needs at a predetermined date, CDs are well worth considering. Remember it’s essential to compare offerings from various banks and FIs, along with their terms and interest rates to make an informed decision that fits your specific investment goals.

FAQs

Q. What is the difference between a certificate of deposit and a fixed deposit?

A. Although banks offer both certificates of deposit and fixed deposit, a primary distinction lies in transferability: CDs are transferable, unlike FDs which do not offer transferability. For FDs, the minimum investment amount is Rs. 1000, whereas for CDs, it is Rs. 1 lakh. FDs are available for both short and long terms, while CDs are primarily intended for short-term use. Additionally, loans can be availed against FDs but not CDs.

Q. Are certificate of deposits (CDs) safe investments?

A. Yes, CDs are generally considered safe investments as they are issued by banks and financial institutions. However, it’s essential to ensure that the issuing bank is reputable and financially stable.

Q. Can I withdraw my investment from a certificate of deposit (CD) before maturity?

A. A. While CDs are typically designed to be held until maturity, some banks may offer early withdrawal options with a penalty. However, this varies depending on the bank and the terms of the CD. It’s essential to check the terms and conditions before investing.

Disclaimer: Investments in debt securities/ municipal debt securities/ securitised debt instruments are subject to risks including delay and/ or default in payment. Read all the offer related documents carefully.