Consider a certificate of deposit if you’re seeking a low-risk, short-term investment. A CD works similarly to your regular savings account. However, it is a better alternative than a savings account because it allows your money to grow during the deposit period, and you don’t have the option to withdraw cash until it is matured. Finding the best interest rates on CDs is the secret to getting the best returns on your investment. It is simple; getting a higher interest rate would mean more money being returned after maturity.
The best way to find a CD
There are two options by which you can purchase a certificate of deposit. You can either buy it from a registered bank or financial institution to issue the certificate or look for a broker. Both these options are readily available. However, there are a few drawbacks if you take the broker route.
Brokers may require you to invest more money than needed for a bank or other financial institution. There is also a risk when purchasing from a broker because the RBI may not authorize them to issue certificates of deposit, putting your investment at risk. Lastly, the brokers would charge a brokerage fee that can be high. Sometimes the price is so high that you may realize that you have paid more than what you have earned on returns. But even with these drawbacks, you plan to purchase it from a broker simply because they have better knowledge about the investment scheme. Therefore, ensure to confirm the fee amount before purchasing and research the authenticity of the broker. However, buying a certificate of deposit from an authorized bank or financial institution is always recommended.
A few things to consider when you purchase a CD
Once you have decided to invest your money in a certificate of deposit, the next thing is to understand the pros and cons of the investment scheme to ensure you are putting your money in the right place. There are several factors to be considered before you purchase a CD, and some important ones are listed below:
- The tenure of the deposit is directly related to the returns. When purchasing a certificate of deposit, you need to decide how long you are willing to lock the money because, during the deposit period, you won’t be able to withdraw cash. Otherwise, you will incur penalties. The higher the deposit period, the better the returns. Therefore, if you want to save some money that you know you won’t be needing shortly, then a certificate of deposit is the right option.
- Every bank or financial institution offers a different rate of interest on CDs. It would help if you always went with the one that provides the maximum return on your investment. Fortunately, you have the option of buying CDs on the internet and can also compare rates from different banks. Just like FD or NSC calculators, CD calculators are also available online that help you determine the right bank to invest your money with. Using the calculator, you can know which bank offers the best interest rate and provides the maximum return on investment.
- Unlike fixed deposits, certificates of deposit require a certain amount of money to be invested. So, if you have that kind of cash available to you, you can think of purchasing a CD.
- Withdrawal Penalty: A common thought behind investing in CDs is saving money for contingencies and earning money while it is saved. Since the amount is locked during the deposit period, you will incur a penalty if you try to dip in early. As a result, even if you are tempted to withdraw money, you would only do so in an emergency.
- Issuer Authenticity: You should only consider purchasing a certificate of deposit from an authorized bank or authority. Since they are fully insured, you can have peace of mind that your money is safe with them.
Limitations of a Certificate of Deposit
Though investing in a certificate of deposit is a good idea, it has its drawbacks that should also be considered when planning to purchase.
- One of the significant drawbacks of a CD is that its owners have easy access to the funds. In any unanticipated financial situation in which the owner wishes to withdraw money, penalty charges are levied on the owner.
- The return on investment is lower than on stocks and bonds. On the contrary, CDs are a safe kind of investment.
- Most banks offer fixed rates of interest on a certificate of deposits. So even if the rates rise during the term, you would still be paid as per the rate of interest offered during the time of purchase
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