Looking beyond the vanilla certificates of deposit
For long, people have believed that certificates of deposits or CD’s are a long term and reliable investment option. But in today’s market, a lot of other options are available when you decide to go for a certificate of deposit as an investment instrument. And the returns can vary along with the term of investment.
The basic certificate of deposit or the traditional version is always long term and has a fixed interest rate or rate of return. There are a number of benefits when you go for such a fixed rate and long term investment option. If you need to withdraw your money during the investment tenure, you will have to pay a penalty. But if you plan well in advance, you need not have to end up withdrawing your money in the middle of the tenure. And you will not risk your investment because it is insured by the FDIC or the federal deposit insurance corporation.
Apart from the traditional vanilla CD, there are many others. The bump CD is one such investment option. It will allow you to change your interest rate once or twice during your investment tenure. The number of times that you can change the interest rate depends on the terms and conditions. But the best type of bump up CD is the type which allows you to do the change just once. Anything more and the initial interest rates will go down. And make sure about taking the right call when you make the bump up, because you will not have a chance to do it again.
Liquid CD’s are another type of CD. They will allow you to withdraw money whenever you want during the term of investment. But again, you can do this only at the end of a month or every quarter. And there are some liquid CD’s that allow you to invest cash whenever you want into the account. And the interest rate will be calculated from the time that you invest the money.
Zero coupon CD’s are another such CD. They pay out interest only at the end of the tenure. And you cannot access the interest during the term of investment. This may seem like a bad deal, but the benefit is that you get a higher interest rate than a traditional CD. The only draw back is that you have to pay taxes on the interest rate even when you do not get any interest during the term of investment.
There is yet another type of risky CD for the lack of a better name. it is called the callable CD. The callable CD is one which can be revoked by the bank during the term of investment. The bank will do this usually when the interest rate goes down below at least 2 percent. So if your initial interest rate was six percent and the market rates go down below four percent, the bank will definitely call the CD. And before you invest in such a CD, read the terms and conditions carefully to understand when and why the bank will call the CD. Failing to do so can result in immense heartache is you later find out that your CD is going to be called and you are going to have to reinvest in a new CD with lesser interest rates.
