FD Vs Certificate Deposit: Meaning and Which Is Better

When it comes to secure investment options, FD vs Certificate Deposit is a common comparison for those seeking fixed income. Both options provide guaranteed returns with fixed interest rates, making them reliable choices for risk-averse investors. 

Even though repo rates change periodically, for example, the Reserve Bank of India (RBI) recently reduced the repo rate from 6% to 5.50%, FDs and CDs remain largely unaffected once booked. That is because these deposits lock in the interest rate at the time of investment. However, while they may seem similar at a glance, there are key differences between the two.

Key Takeaways:

• FDs and CDs both offer fixed and guaranteed returns
• FDs can be started with as little as ₹1,000, whereas CDs require a minimum of ₹5 lakh
• You can get a loan against an FD, but loans against CDs are not allowed.
• FDs offer tenures up to 10 years, while CDs typically range up to 3 years 

Fixed Deposit: What It Means

If you are investing in a fixed deposit, you are depositing a lump sum amount for a specific duration at a fixed interest rate. Banks, Non-Banking Financial Companies (NBFCs) and post offices offer various FD schemes. The interest rate stays constant throughout the tenure, ensuring assured returns. However, the rate varies based on the amount you invest, the duration and the institution you choose.

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If you are a senior citizen, you can benefit from higher interest rates on your FD investments. While many FD schemes allow early withdrawals, you have to pay a penalty if you withdraw before maturity. Certain FD schemes with a tenure of 5 years also provide tax benefits wherein you can avail deductions of up to ₹1,50,000 under Section 80C of the Income Tax Act, 1961. Moreover, you can use your FD as collateral to secure loans at lower interest rates. 

Certificate of Deposit: What It Means

Certificates Deposits (CDs) are money market instruments that you can invest in to earn a fixed return. Issued in a dematerialised form, they are held with depositories registered under the Securities and Exchange Board of India (SEBI) and regulated by the Reserve Bank of India (RBI).

If you choose CDs, you can invest a fixed amount for a fixed tenure, making them a structured investment choice. The minimum amount you can invest is ₹5,00,000, and additional investments can only be made in multiples of ₹5,00,000. You can invest in CDs for a tenure of 7 days to 1 year and cannot withdraw your funds before the maturity date. CDs are a popular choice among investors because they typically offer higher interest rates compared to other financial instruments.

Key Features of Fixed Deposit

Fixed deposits are perfect for those who prefer stability over surprises. Here’s what makes them a go-to choice for many investors: 

• Consistent Returns: FDs provide fixed, predictable returns, making them a trustworthy investment option.
• Loan Against FD: Several banks allow you to take a loan against your FD, offering flexibility and access to funds when required.
• Customisable Duration: Investors can select a tenure that suits their financial objectives.
• High Safety: FDs are regarded as a secure investment, especially when held with well-established banks as these are insured under DICGC (Deposit Insurance and Credit Guarantee Corporations) up to ₹5 lakh. 

Key Features of Certificate of Deposit

Certificate of Deposits work well when you are looking to park a large sum for the short term, without compromising on safety or returns. Here's what sets them apart:

• Better Interest Rates: CDs typically offer higher interest rates compared to standard savings accounts, making up for their limited liquidity.
• Defined Maturity Period: CDs come with a fixed maturity period, which can range from a few months to several years, giving you a clear investment horizon.
• Low Risk: Since CDs are issued by banks, they are considered relatively safe, especially when offered by trusted financial institutions.
• Early Withdrawal Penalty: If you withdraw your funds before the maturity date, you may incur a penalty, ensuring the investment remains stable.

Key Differences Between FD vs Certificate Deposit 

The following table shows a comparison of Certificate of Deposit vs FD in India:

FD vs Certificate Deposit: Which Is Better? 

When comparing FD vs Certificate Deposit, your investment amount and tenure play a key role in deciding which option suits you best. It is essential to align your choice with your financial goals and the funds available. If you have a lump sum amount sitting idle in your savings account and aim to achieve a financial goal five years down the line, opting for an FD is a smart move.

On the other hand, if your financial goal is short-term and you have sufficient funds ready, a Certificate of Deposit could be a better choice. Make sure to review the early withdrawal terms of a CD scheme, especially if you might need quick access to funds in an emergency. You must keep in mind that these terms can vary across financial institutions, so choose accordingly.

Notably, CD vs fixed deposit interest rates are subject to periodic changes with repo rate cuts by the RBI. However, once you book a deposit at a predetermined rate, the interest rate prevails until maturity.

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