Certificate of Deposit – Fixed Deposit

The following are the salient features of the Certificate of Deposit:

• Eligibility: Only scheduled commercial banks/financial institutions in India (allowed by RBI) can issue Certificates of Deposit. Co-operative banks and Regional Rural Banks cannot issue these certificates. These can only be issued to individuals, companies, funds, etc. It can be issued to Non-Residential Indians (NRIs) on non-repatriable basis.
• Maturity Period: A Certificate of Deposit issued by the commercial banks can have maturity period ranging from 7 days to 1 year. For financial institutions, it ranges is from 1 year to 3 years. Minimum amount to be deposited is Rs. 1 Lakh.
• Transferability: Certificates which are available in demat forms must be transferred according to the guidelines followed by demat securities. While dematerialised/electronic certificates can be transferred by endorsement or delivery.
• Availability of Loan: Since these instruments do not have any lock-in period, banks do not grant loans against them. In fact, banks cannot even buy back certificates of deposit before maturity. They will have to first consider the Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR) on the issued Certificate of Deposit Rates or prices.

Certificate of Deposit interest rates are generally determined by the following three factors:

• Duration of the Certificate of Deposit: The maturity duration of the Certificate of Deposit is the first and foremost determinant factor for the rate of interest. Longer duration generally results in higher interests.
• Current Rate of Interest: Current rate of interest must be checked as Reserve Bank of India (RBI) regulates and changes the interest rate of Certificate of Deposit (CD) at certain intervals.
• Expected Rate of Returns: This is another important factor that determines the Certificate of Deposit interest rates. Check which bank can provide highest return on your deposited money. You can also seek an expert’s help on this.

Certificate of Deposit is an agreement with the bank to deposit a certain amount for a fixed period of time. On this, the bank will pay the interest on the deposited amount. The amount deposited is also restricted or locked for the duration selected. This is a freely negotiable investment.

On the other hand, a Fixed Deposit (FD) is a type of investment option that is provided by the banks and other non-banking financial companies. This instrument provides a higher rate of interest to the investor as compared to normal savings account. This cannot be negotiated freely.

The selection between Certificate of Deposit and FD depends on the investment objective of the investor. One should consult with their financial adviser to understand which option will best match their investment, based on the risk and expected returns involved. While Certificates of Deposit offer high interest rates and are low-risk investments, yet there are certain points to be considered before investment as Certificates of Deposits are not entirely liquid as well as there are early withdrawal penalty risks and inflation risks involved. Similarly, Fixed Deposits are a safe investment but are prone to inflation risks, interest on FDs may not be tax-exempt and not all FDs can be easily liquidated.

In general, an individual will get a higher rate of interest on their investment if they increase the length of time or increase the deposited amount. Here are some basic yet useful guidelines to follow while choosing the term of Certificate of Deposit:

• An investor should decide how long they are willing to leave their money untouched. After this, search for the providers that offer higher rates of interest within the specified time frame.
• If the interest rate is expected to rise in the future, one can consider shorter tenure so as to renew it at higher rate of interest. In case, interest rate doesn’t rise yet the invested money is safe from from unnecessary fluctuations in the interest rate.
• Choose a longer time horizon for Certificate of Deposit to lock-in a better interest rate later if the interest rate is expected to decline or flat in the near future.

Buying or selling dematerialised Certificate of Deposit is similar to buying or selling of shares. Initially, sellers and buyers agree upon the price and quality for the transaction. After this, the seller authorizes its depository participants (DPs) through delivery instructions slip. These include the instructions to debit the seller’s account and transfer the Certificate of Deposit to the account of the buyer. In case of any confusion, one can also get help from a professional for better assistance.