Fixed Deposit vs Certificate of Deposit: Differences

 Fixed Deposits (FDs) are a widely preferred investment option due to their safety, simplicity, and guaranteed returns. They are popular among risk-averse investors who prioritize capital preservation and stable returns over potentially higher, but uncertain, gains from more volatile investments like stocks. Within the category of Fixed Deposits, there are two main types that investors should be aware of: Callable and Non-Callable Fixed Deposits. Understanding the differences between these two types of FDs can help you make informed investment decisions that align with your financial goals.

What are fixed deposits

A fixed deposit (FD) is a type of account. In this account, you deposit a certain amount of money for a set period, which usually ranges from a week to 10 years. It must be noted that FDs offer a higher interest rate than savings accounts because the money is locked in for a specific duration. This means you cannot withdraw the money until the end of this duration without a penalty.

In India, the concept of FDs was started in 1951. The State Bank of India launched the first fixed deposit scheme, where people could open an FD account with as little as Rs. 100.
 

What are certificates of deposit

Certificates of deposit (CDs) are almost similar to fixed deposits. That’s because both these schemes are “time deposits” and carry a fixed interest rate. CDs are also issued by banks and promise to pay the investor a fixed amount at the end of a specified period.

CDs generally require a higher minimum investment, usually at least Rs. 1 lakh in India, whereas FDs have a lower starting amount. Also, CDs offer higher interest rates than FDs.

Furthermore, CDs have shorter terms, mostly between 7 days and 1 year/3 years. All scheduled commercial and nationalised banks in India can issue CDs. Starting in 2021, RBI even allowed the Regional Rural Banks (RRBs) to issue them.

If you are looking for safe investment option, then you can consider investing Bajaj Finance Fixed Deposit. With a top-tier AAA rating from financial agencies like CRISIL and ICRA, they offer one of the highest returns, up to 8.85% p.a.
 

Key differences between fixed deposit and certificate of deposit

Certificate of deposit vs Fixed deposit: Which scheme to invest in

Ideally, when deciding between a fixed deposit and a certificate of deposit, you must consider:

• How much money do you want to invest?
  and
• How long do you want to invest in?
   

You can choose an FD if you have a large amount of money you don't need immediately and a financial goal that is several years away (like 5 years). That’s because FD offers stability and a longer investment period.

Whereas, if you have a shorter financial goal and a considerable lump sum of money to invest, a CD might be better. It is worth mentioning that CDs are ideal for short-term investments, but they have stricter rules for early withdrawal, which vary by financial institution. Hence, when choosing CDs, make sure to check these terms if you think you might need the money sooner.
 

Conclusion

Both fixed deposits and certificates of deposit are secure investment options. They provide higher returns than a savings account. FDs are generally more flexible, with a lower minimum investment amount and longer tenure options. These features make them suitable for long-term financial goals.

CDs require a higher initial investment and are better for short-term goals. Mostly, they offer higher interest rates than FDs but come with stricter rules for early withdrawal, which vary by institution.

By understanding the differences between these investment options, you can make informed decisions that align with your financial objectives, risk tolerance, and investment horizon. Whether you prioritize liquidity, higher returns, or capital preservation, there is a suitable investment option for every type of investor.