The hybrid certificate of deposits – a mix of investment and savings accounts
The certificates of deposits, which were at one point of time, shunned by most customers because of low yield and tight regulations are now back, with a bang. This financial tool has evolved with the passage of time and the CDs available in the market today for the customers to choose from offer the safety of the savings account and the returns of a good investment. It is no wonder then that an increasing number of people with spare cash on hand is hunting for banks that offer competitive rates, thereby assuring better returns.
It is not erroneous to say that the Certificate of Deposit is a perfect cross of the savings account and an investment option. Just like in the case of a savings account, the amount of money you invest in the CD is insured by FDIC, but unlike in the case of savings account, the interest rate offered on the certificate of deposit is significantly higher. As compared to investment options such as stock markets, mutual funds and bonds, the Certificate of Deposit is much safer since you do not risk losing your money. However, the similarity is that, in certain cases, the amount you earn as interest on the CDs is compared to the returns you earn through other forms of investment.
Unlike in the case of any investment option or savings account, the certificate of deposit is a time bound investment. This implies that you have to lock in the amount on hand for a particular period of time without delving into it midway through the term period. This is unlike in the case of investments such as stocks that you choose to sell as and when you feel it is time. Also, you are not allowed any ATM or debit card transactions on the money you deposit, which is another difference between the CDs and the savings account.
When you compare the CD and the savings account, the amount you earn on the money deposited is definitely higher, although you don’t get to withdraw it midterm. There are multiple ways in which you can earn higher returns on the money you invest in a CD. While one option is to go in for long term CDs that offer higher interest rates, the other method is CD laddering which is smarter than long term deposits since it gives you a chance get better yield without compromising on liquidity.
