Is it worth to invest in a jumbo CD considering the current rates?

A jumbo CD is almost similar to the traditional CD or certificate of deposit, the only difference being jumbo CD requires a deposit which is a larger denomination, the minimum being $100,000.  These jumbo CD’s are also called ‘negotiable certificates of deposit.’  These CD’s are low-risk as well as stable investment options for large investors.  Just as in traditional CD’s there is a lock in period for the jumbo CD’s also and hence termed ‘time deposits’ as the principal amount is locked in for a set period of time and mostly between 3 months to 6 years.  The investors earn guaranteed returns at a fixed rate of interest which is set at the time of making the purchase.  The investor gets the returns either after the CD matures or when the CD reaches the end of term.

Generally, CD’s are FDIC insured and hence the investment is safe and there is guarantee on the principal amount.  However, since the insurance cover will be applicable only for amounts up to $100,000 Jumbo CD’s as well as the returns on them will not come under the FDIC cover.  Hence the inherent risk of investing in jumbo CD’s is much higher than that of a traditional CD.

The rate of return:

The rate of return in the case of Jumbo CD’s is much higher than a traditional savings or a money market account.  The rate of return is directly based on the lock in period of the principal amount.  The longer the lock in period, higher the returns.   For instance a CD with a six-year lock in period would fetch a much higher rate of interest than the one which is locked in for 6 months, for the same principal amount.  Due to the high rate of returns in a jumbo CD they are not as liquid as any other savings account.  However one major concern with a jumbo CD is the amount that could be forfeited in case of early withdrawal.  In such cases, the penalty fees could be a portion of the returns and they are quite severe in case of a jumbo CD.

Hence, Jumbo CDs are for those who would be able to purchase and use it wisely.  When investors follow the proper rules and stay invested for longer periods they can expect huge benefits.  However, if one cannot stay invested for long and withdraws prematurely, then it would be a total waste of both time and money.