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Certificate of Deposit (CD) Investment

In India, there were very few debt/money market instrument options available for short-term investors. To further augment the range of debt instrument/money market instruments, the apex bank Reserve Bank of India (RBI) introduced the Certificate of Deposit (CD) in India in 1989, which has gained popularity for retail participation. In addition, RBI keeps amending its directives from time to time to facilitate investors with greater flexibility in deploying their surplus funds.

Recent Amendments

Recently, as of 4th June 2021, the RBI has issued the amendment circular for CDs. As per the Master Direction on Reserve Bank of India (Certificate of Deposit) Directions, 2021, -

  • RBI has increased the minimum denomination for a CD to Rs 5 lakh, and after it, an investor can invest in multiples of Rs 5 lakh only. Earlier, banks were free to issue CDs as per their funding requirements.
  • All individual residents in India can invest in CDs. Earlier, RBI permitted companies, trusts, funds, associations, Non-Resident Indians (NRIs) under the eligibility for investors.
  • Now, All India Financial Institution, Scheduled Commercial Banks, Regional Rural Banks (RRBs), and Small Finance Banks are allowed to issue CDs. Earlier it was limited to scheduled commercial banks and All-India Financial Institutions.
  • RBI does not allow the issuing bank to grant a loan against CDs to the depositor.
  • CDs can be issued in dematerialised form only. Earlier, depositors were allowed to raise a request to get a physical certificate of the deposit.

What is Certificate of Deposit

A certificate of Deposit (CD) is an electronic short-term negotiable money market instrument to be held with a SEBI-registered (Securities and Exchange Board of India) depository. A negotiable instrument guarantees the repayment of the principal amount along with interest at the pre-specified rate. CDs are governed by the RBI and issued by authorized banks against the funds deposited by an investor.

Features of Certificate of Deposits

  • Denomination

    The certificate of deposit minimum amount is Rs 5 lakhs from 7th June 2021 onwards, and you can invest in as many as CDs but in multiples of Rs 5 lakhs only.
  • Maturity Period

    The minimum period of a certificate of deposit is seven days, and the maximum is one year with banks. However, All-India Financial Institutions are allowed to issue a CD with the maturity between 1-3 years. Therefore, it is categorized as a short-term money market instrument.
  • Investor Eligibility

    An individual resident in India can invest in CDs. RBI has removed other categories of investors from its eligibility criteria.
  • Interest Rate

    A high and fixed interest rate is what attracts more investors towards CDs. CD rates can be fixed rates or floating rates. In the case of floating rate, the interest rate is to be reviewed at periodic pre-specified intervals. Such reviews and revisions will be transparent and objective as per the benchmark published by FIMMDA (Financial Benchmark Administrator or approved by the Fixed Income Money Market and Derivatives Association of India).
  • Security of Investment

    Investors will get a CD in dematerialised form only secured with a depository established under the Companies Act, 1956 and registered under the Securities and Exchange Board of India Act, 1992 (15 of 1992).

    Investing in a CD account is easy. You can open an online CD account with an authorized bank. You will not get a physical certificate of deposit, unlike a fixed deposit certificate.
  • Taxability

    Certificates of deposits are fully taxable in the hands of investors under the Income Tax Act.
  • Trading Venues

    You can trade CDs:
    - in Over-the-Counter (OTC) markets
    - or on stock exchanges under the Securities Contract Regulation Act, 1956 with the approval of the RBI.

    The settlement cycle in OTC is T+(0/1). OTC markets refer to a decentralized market without physical existence, and trades are executed on electronic trading platforms. Here the trade takes place between the seller and buyer without a central exchange or broker.
  • Loans Facility

    Depositors cannot get loans against CDs, except permitted explicitly by the RBI. However, the issuer is permitted to buy back CDs before maturity at the prevailing market price. The investors can opt for accepting or rejecting the CDs bought back offer as per their desire.

For certificate of deposit vs. fixed deposit, when it comes to flexibility in terms of the investment amount, investors prefer fixed deposits.

Certificate of Deposit FAQs

1. What is a certificate of deposit?

Certificate of deposit in the money market is a negotiable option where you can invest in multiples of Rs 5 lakhs for the short term to earn a fixed income at a pre-specified interest rate.

2. What is the eligibility for issuance of a certificate of deposit?

The RBI authorizes RRBs, Small Finance Banks, Scheduled Commercial Banks, and All India Financial Institution to issue CDs.

3. What are the advantages and limitations of investing in CDs?

Investors can earn fixed returns at a higher and a pre-agreed interest rate.
Investors can collect the interest earned on CDs monthly or annually.
CDs are inflexible and limited in terms of the tenor.
Money market CDs struggle to beat inflation.

4. Who should invest in a certificate of deposit?

An investor who wants to invest accumulated surplus funds for the short term with minimum risk of investing can consider CDs.

5. How to calculate income earned from a certificate of deposit?

You can calculate total interest, maturity amount and view the growth chart with a Certificate of Deposit calculator available online for free.

6. Are FDs and certificates of deposit different?

Yes, fixed deposits (FDs) and certificates of deposit (CDs) are two different instruments.
CDs are not limited to short-term investors. FDs are flexible enough for every type of investor.

7. Comparison Between Bajaj Finance FD Vs. Certificate of Deposit.

  • A CD does not offer a loan facility, but Bajaj Finance FD offers.
  • CDs are limited to a tenor of one year only, whereas Bajaj Finance FDs are available for 12-60 months, thus, more flexible than CDs.
  • You need Rs 5 lakhs to open a CD account. On the other hand, you can start an FD account with Bajaj Finance with Rs.25,000 only.

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