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Certificates of Deposits: Understanding Its Basic Features

A Certificate of Deposit is a debt investment method that provides interest on a lumpsum amount of money parked by the investor for a specific period of time.

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Certificates of Deposits: Understanding Its Basic Features

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  1. Certificates of Deposits: Understanding Its Basic Features

  2. Certificate of Deposit: An Introduction • A Certificate of Deposit is a debt investment method that provides interest on a lumpsum amount of money parked by the investor for a specific period of time. • While CDs are offered by a large number of institutions, the lock-in period of each CD is different as per the discretion of the issuer. However, most CD investments are short-term bond avenues that typically mature faster than other debt schemes. • Owing to the ease of investing associated with CDs, many beginner investors opt for this investment strategy as a stepping stone into the world of investment. • Here are some features of Certificates of Deposits that investors should know of before stepping in:

  3. Certificates of Deposit are Lower-Risk Investments Compared to Other Securities. • Typically, the risk involved in a CD investment is much lower compared to other securities like stocks and bonds. This is because CD involves depositing a lump-sum amount and directly receiving interests on it. • Thus, the interest received on CDs are comparatively lesser than that derived from other investment avenues. However, it is a sound investment decision for conservative investors who are looking for low-risk schemes with reasonable returns.

  4. CDs are Highly Liquid Investments. • Certificates of Deposit are highly liquid as these have shorter tenures than other avenues. • This implies that the corpus deposited in CDs may be freely withdrawn after maturity, without the investor having to incur any penalties. • As a result, CDs can also be used as vehicles entailing emergency funds that may be withdrawn on an immediate basis in the case of unexpected circumstances.

  5. CDs are More Lucrative than Traditional Savings Accounts. • Certificates of Deposit may not be as high-yielding as the other debt investment options; however, these are popular choices over the traditional savings accounts. • CDs tend to yield higher returns compared to other money market instruments like company fixed deposits, RDs and savings accounts. • At the same time, since the process of investing in this security is just as straightforward and easy as these other avenues, it is a preferred investment option for beginners and seasoned investors alike.

  6. A CD is One of the Best Investment Options for Fulfilling Specific Investment Goals. • CDs involve parking the corpus for extended periods of time and reaping systematic interests on the same. • As a result, they may be used to fulfil specific investment objectives included in one personal financial planning strategies. These objectives may include planning a trip, carrying out wedding expenditures, buying a vehicle and so on.

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