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.
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, -
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.
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 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.
The RBI authorizes RRBs, Small Finance Banks, Scheduled Commercial Banks, and All India Financial Institution to issue CDs.
Advantages:
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.
Limitations:
CDs are inflexible and limited in terms of the tenor.
Money market CDs struggle to beat inflation.
An investor who wants to invest accumulated surplus funds for the short term with minimum risk of investing can consider CDs.
You can calculate total interest, maturity amount and view the growth chart with a Certificate of Deposit calculator available online for free.
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.
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