Certificate of Deposit

The Certificate of Deposit (CD) is an agreement between a depositor and an authorised bank or financial institution. Depositors invest a certain amount for a pre-decided tenure, while banks and financial institutions pay an interest on the invested amount. The fixed pre-decided tenure ensures that the invested amount cannot be retrieved before the completion of the pre-determined tenure. The investment amount in this instrument is easily negotiable.

Depositors, which can be individuals, companies and corporations, are issued a promissory note by the relevant bank or financial institution. This amount is insured by the Federal Deposit Insurance Corporation (FDIC). The Reserve Bank of India (RBI) presides over the guidelines regarding investments in CDs.

Certificates of Deposit were introduced in India in the year 1989 to increase the range of money market instruments, enabling investors in the country to manage short term funds more effectively. CDs are issued in the dematerialised form or electronically.

Once an investment in Certificate of deposit matures, the depositor gets a grace period of 7 days to decide over the future course of action with the matured amount. In case the depositor does not withdraw the amount within the grace period, he/she is restricted from withdrawing it and the matured amount is reinvested. The matured amount can also be withdrawn after the lapse of the grace period against a payment of penalty or on demand.

Features of Certificate of Deposit

Below are the salient features of Certificates of Deposit:

A selective list of commercial banks and financial institutions have been authorised by the Reserve bank of India (RBI) to issue Certificates of Deposits. Rural regional banks and co-operative banks cannot issue CDs.

Individuals, companies, corporations, etc. are eligible depositors for Certificates of Deposits. Non Resident Indians (NRI) can also be issued CDs on a non-repatriable basis.

The minimum amount that has to be deposited in a Certificate of Deposit is Rs. 1 lakh.

The tenure for Certificates of Deposit issued by commercial banks varies between 7 days and 1 year. The maturity term for CDs issued by financial institutions varies from 1 year to 3 years.

Dematerialised or electronically generated certificates can be transferred by delivery or endorsement, while those in demat forms can be transferred as per the guidelines set for demat securities.

Authorised banks and financial institutions cannot grant loans to depositors against Certificates of Deposits as these money market instruments are not accompanied by a lock-in period. The invested amount cannot be retrieved before the completion of the pre-decided maturity tenure.

Benefits of Certificate of Deposit

Safe investment option

Certificates of Deposits are a comparatively safer investment plan instrument than other investments that are vulnerable to the volatility of the capital market like bonds and stocks. Hence, their returns are not guaranteed. In the case of CDs, the authorised banks and financial institutions issuing the CDs invest the amount further in safe instruments that generate growth.

Fixed interest rate

CDs are offered at a pre-decided interest rate that remains constant throughout the investment tenure, enabling investors to predict their returns.

Higher interest rate than savings bank account

The interest rates of Certificates of Deposits are higher than that of savings bank accounts and are earned at the pre-determined fixed rate.

Short term investment option

CDs are accompanied by a short maturity term, implying that the invested amount will remain non-retrievable only for a short period of time.

Higher returns for higher maturity term

Staying invested for a longer tenure generates higher returns, ensuring flexibility.

Effective investment for idle capital

CDs are a smart investment for depositors with idle capital that they don’t know how to utilise presently. This capital can be invested for a short term in a CD and renewed further, if required.

Versatile investment

The features and benefits of Certificates of Deposits ensure that they are well suited for investors across investment objectives and income groups.

Wide range of choices

There is an extensive list of commercial banks and financial institutions that have been authorised by the RBI to sell CDs. Hence, investors can select the one that meets their unique investment objectives the best.

Grace period

The grace period after the completion of the maturity term, which generally spans for 7 days, enables the depositor to plan further investments with the matured amount.

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Eligibility for Issuance of Certificate of Deposit in India

A selective list of commercial banks and financial institutions have been authorised with the responsibility of issuing Certificates of Deposit as per the mandate set by the Reserve Bank of India (RBI). Co-operative banks and regional rural banks cannot issue Certificates of Deposit. CDs can be issued to individuals, organisations, corporations, fund houses, etc. They can also be issued to Non Resident Indians (NRIs) on a non-repatriable basis.

Who Can Invest in Certificate of Deposit in India?

According to the Reserve Bank of India (RBI) guidelines, individuals, corporations, organisations, etc. can invest in Certificates of Deposits in India. Non Resident Indians (NRI) can also invest in CDs on a non-repatriable basis.

How to Choose a Certificate of Deposit?

The following are the considerations that you should keep in mind while choosing a Certificate of Deposit:

A deposit should be well aware of the tenure for which he/she would like to invest in a CD, keeping in mind that the invested amount cannot be retrieved during this term. He/she can accordingly look for a CD that offers the highest interest rate within this tenure.

Depositors investing in a Certificate of Deposit whose interest rate is estimated to decline, it is recommended that he/she opt for a longer maturity term to overcome any chance of losses.

For CDs whose rate of interest is expected to increase in the future, depositors can opt for a short maturity term. This would enable them to renew the CD at a time when the interest rate is higher. Even if the interest rate does not rise, he/she would be able to keep the investment away from unexpected fluctuations.

How to Calculate Your Income from Investment in a Certificate of Deposit?

Commercial banks and financial institutions consider two parameters while issuing a Certificate of Deposit

Discount on Face Value: The concerned bank or financial institution has the autonomy to decide on the discount rate, also known as the coupon rate.

On the Basis of a Floating Rate: The process of calculating the floating rate is objective and market-based benchmark to ensure transparency. The interest rate on floating rate CDs in India varies from time to time.

Investors have to be aware of whether a CD is based on discount on face value or is based on the floating rate. This will enable the investor to calculate his/her annualised income.

List of Certificate of Deposit Issuers

Click here to know about List of Certificate of Deposit Issuers

FAQs on Certificate of Deposit in India

How can I invest in Certificate of Deposit in India?

Individuals, companies, corporations, etc. can invest in Certificates of Deposit issued by selected commercial banks and financial institutions that have been authorised by RBI. Regional rural banks and co-operative banks cannot issue Certificates of Deposit.

What is the minimum amount for investing in a Certificate of Deposit?

As per RBI guidelines, the minimum amount for investing in a Certificate of Deposit is Rs. 1 lakh.

Who can buy a Certificate of Deposit?

Certificates of Deposit can be issued to individuals, companies, funds, corporations, etc. They can also be issued to NRIs or Non Resident Indians on a non-repatriable basis.

Is Certificate of Deposit same as Fixed Deposit?

Certificate of Deposit enables depositors (individuals, corporations and companies) to enter into an agreement with certain authorised banks and financial institutions to deposit a specific amount for a per-decided tenure. This implies that the deposited amount cannot be retrieved before the completion of the pre-decided tenure. However, the investment amount can be negotiated. The authorised banks and financial institutions pay an interest on the deposited amount.

In contrast, a Fixed Deposit is offered by banks and other non-banking financial companies. Investments towards FDs attract a comparatively higher interest rate than normal savings account. Unlike CDs, the investment amount cannot be negotiated.