What are the basics of short term CD’s to be aware of before investing?

Customer behaviour to a large extent depends upon the market moves. In case the interest rates are low then customers tend to spend their money, whereas when the rates are high, customers try to save money in all possible ways. CDs are one such way in which customers get the chance to invest as well as earn higher yields in return.

Certificate of deposit or CDs are investments that are time locked and yield high returns at the end of maturity date. Depending upon the tenure for investment, CDs can be short term or long term ones. The certificates that remain time locked for shorter period are called short time CDs and those that remain time locked for a longer time period are called long term CDs.

Advantages of short term CD 

  1. In short term CD investment investors are allowed to earn profit over a very short period of time. The time period of short term CD varies from six months to one year. While in case of long term CDs, the investor needs to keep the money untouched for a minimum of three years.
  2. Short term CD strategy helps in utilizing the money according to the changing market scenario. Although short term CDs earn lesser interest rates but one can reinvest the money as per the market readings.
  3. The short time CD investments are not time locked. Investors therefore get access to their money soon and can use them in the time of their need.
  4. Short term CDs are good for investing in CD ladders.
  5. Short term CDs provide a good source of continuous income. These amounts on maturity can again be invested in accounts with higher returns and benefits.
  6. Short term CD investments do not require greater amount to be invested. One can invest small amounts and then again reinvest the maturity amount to get back greater benefits.
  7. In long term CDs, if the maturity amount is withdrawn before the maturity date then it attracts penalty. Short term CDs are for a very shorter period and so investors do not need to withdraw money before maturity and call for penalties. 

Disadvantages of short term CD 

  1. While investing in short term, CD gives the investor access to his money at a very short period of time but he loses the higher interest rates availed on long term CDs.
  2. If not invested properly, the profit gained in short term CD can go waste. 

Certificate of deposits that are both short termed as well as long termed are good options of investment. The two factors that will decide the type of investment plan are

  1. The amount of money that can be invested.
  2. The period for which the customer can remain invested without attracting penalties.

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