CDs were introduced in the year 1989 to increase the range of money market instruments & to enable the investors to manage short term funds more effectively.
In other words, the Certificate of Deposit (CD) is basically an agreement between the depositor and the bank where a predetermined amount of money is fixed for a specific time period. It is a fixed-income financial instrument governed under the Reserve Bank of India (RBI) & issued in a dematerialized form.
These instruments can be issued by any All-India Financial Institution or Scheduled Commercial Bank.
FEATURES OF CERTIFICATE OF DEPOSIT
The following are the main features of CDs –
- CDs can be issued in India for a minimum deposit of Rs 1 lakh and in subsequent multiples of it.
- Commercial Banks issue CDs which have a tenure ranging from 7 days to one year. However, financial institutions issue Certificate of deposits with different maturity dates. They can be 1 year CD up to 3 year CD.
- Certificate of deposit is issued at a discount on face value. Also, financial institutions, banks and credit unions can issue Certificate of deposits on a floating rate basis
- Banks cannot buy back a CD before its maturity.
- They are fully taxable under the Income Tax Act.
- Dematerialised Certificate of Deposits can be transferred by endorsement or delivery.
WHO CAN INVEST IN CERTIFICATE OF DEPOSITS ?
As per the guidelines by RBI, the following can invest in a certificate of deposit-
- Ordinary individuals
- Financial institutions
- Mutual fund associations
- NRIs (they are not allowed to repatriate on maturity)
HOW TO INVEST IN A CERTIFICATE OF DEPOSIT ?
Authorized banks and financial institutions can issue Certificate of Deposit. Individuals, banks, corporations, trusts, mutual fund, etc. can invest in CDs. One can pick a type of CD they want to invest based on their investment duration. Next, is to choose how they want to collect their interest payments either monthly or annually.
Finally, once an individual opens the demat account, the CD will be in the demat account.
ADVANTAGES OF INVESTING IN CDs
- Certificate of Deposit offer a higher rate of interest and better returns in comparison to the traditional savings accounts.
- Investments in CD grant a grace period of 7 days to the investor to decide whether or not he/she wants to reinvest the matured amount.
- A certificate of deposit is a very secure short to mid term instrument with an assured sum at maturity, similar to traditional insurance.
- Risk is less in CD compared to other money market instruments like stocks, bonds, etc., as the money deposited is safe with the banker.
Thus, in simple words, a Certificate of Deposit (CD) is a money market instrument issued in a dematerialized form for a specific period by a bank to raise funds from the secondary money market .