Jumbo CD, a low risk high return investment vehicle

What is a CD? 

A CD means a Certificate of Deposit. It is another form of a demand deposit or a savings account that one can maintain with a bank or a financial institution, with two major differences. A CD has a fixed tenure till which the money cannot be withdrawn and is therefore also referred to as a time deposit or a fixed deposit, unlike a savings account or demand deposit in which the money is payable on demand at any time. Second, since the bank can utilise the money placed in a CD till the end of the tenure, hence it offers much higher rate of interest to the investor than a regular savings account. 

What is a Jumbo CD? 

A Jumbo CD is a CD amounting to more than $ 100000. It carries a much higher rate of interest than a regular CD. This type of Jumbo CD is usually a low risk high return investment vehicle.  These Jumbo CDs have tenures ranging from six months to five years. Institutional investors like banks and pension funds or high net worth individuals with large invest able surplus are the types of investors who go in for a Jumbo CD. 

What do I gain by choosing a Jumbo CD? 

Since a person who is investing in a Jumbo CD is bringing in an amount upwards of $ 100000, hence he would expect better benefits from this investment. The first and most obvious advantage is the rate of interest, which is often much higher than a regular CD of higher tenure! The longer the tenure of the Jumbo CD, the higher is the rate of interest offered. Also, the risk involved is much lower and investors usually consider this a low risk vehicle. 

Are there any demerits in a Jumbo CD? 

All bank deposits of all kinds are insured up to an amount of $100000 by FDIC. Since Jumbo CDs start off from $100000 hence the full amount invested in a Jumbo CD is obviously not insured. Secondly, if someone wishes to withdraw the money before term maturity, the investor would not only have to pay a penalty from the maturity amount, but might also have the interest rate reduced drastically. Hence an investor should be reasonably confident that he would not require the principal amount within the Jumbo CD tenure, to avoid significant losses due to a premature withdrawal. 

So how do I choose the best Jumbo CD? 

All banks which offer Jumbo CDs offer very high rates, and each of them might claim that their Jumbo CD is the best. So how does one sift through the sales clutter and zero in on the best choice. The internet gives you a chance to browse the websites of the various banks offering Jumbo CDs and compare the various offerings of different banks. Better still, you could log on to one of the numerous comparison sites on the internet and evaluate the comparative benefits. Another important thing apart from the best rate is the quality of the bank and the kind of relation you have with the bank, so that they are honest with you about any hidden clauses or fees. 

To sum up, a Jumbo CD can be a rewarding and safe investment if you have a substantial amount of capital ready for investment, provided you examine the pros and cons carefully.