The fundamentals about variable CD rates every consumer should know

The abbreviation CD here stands for Certificate of deposit. A certificate of deposit is a kind of financial instrument which allows an investor to invest funds. It helps earn higher interest rates than other financial instruments in the category such as the checking account or the savings account. A certificate of deposit is one of the many available methods at the disposal of the investor to be able to save money as well as earn interest. This can be done both at fixed and variable interest rates.

The interest rates earned on the certificates of deposits is mostly of two kinds: fixed and variable. In case of Variable CDs, as the name suggests, the rates of interest are not fixed. These rates of interest are adjusted according to various market benchmarks like the stock index and the various fluctuations that come about in them accordingly.

A Variable certificate of deposit can be identified from that of a fixed certificate of deposit rather easily. In case of Variable CDs, the rates of interest keep on changing through the term of the certificate of deposit. These changes occur generally in accordance with the various fluctuations that come about in the stock index.

In general, there are two types of Variable certificate of deposit rates: Indexed Variable Certificate of deposit rates and Non-Variable certificate of deposit rates. In case of an Indexed variable certificate of deposit rate, the rates relate to a particular pre-fixed or established rate/index by the government body. For instance, in case the Indexed Variable certificate of deposit rate is related to the stock index, then the rate of interest on the variable CD rises or falls in accordance with the rise or fall of the stock index.

On the other hand, in case of the non-variable rate certificate of deposits or the Scheduled certificate of deposits, the rate of interest keeps on changing periodically in accordance with a previous schedule that was disclosed at the time of investing in the certificate of deposit. 

Important Features

Some of the Indexed variable certificate of deposit rates allow the depositor to opt for the option of withdrawing the invested funds before the maturity date. One can withdraw earlier and even without paying any penalty. This can be done if the interest rate on the certificate of deposit falls below a certain percentage. Even the non-indexed certificates of deposits, do sometimes permit a depositor to withdraw the invested funds without any penalty on a particular date when the schedule change of rate takes place.

Why prefer a Variable CD?

The Variable certificate of deposit pays a comparatively higher rate of interests than other certificate of deposits. This makes the decision of investing in a Variable CD wise. The fact however remains that Variable CDs do fluctuate in accordance with the prevailing market conditions and involve a certain risk factor. Despite this, these can be preferred over other certificates of deposits as they ensure a relatively higher rate of return on investments made.