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Certificate of Deposit: Advantages, Disadvantages, How To, Templates & Examples

Signing the Certificate of Deposit

The Government of a country needs to raise money to meet its financial requirements. There are different fiscal policies which play a major role in maintaining the money market of a country. To keep the money flow as well as to be able to invest in the development policies of the nation, the Government needs to raise money. This scenario is same for all the Governments in the world who reach out to their public to raise money and keep the cash flowing. For this very reason, the Government of a country offers different financial instruments to raise money, either for short or for a longer term. Such financial instruments are available to the public who may choose to invest their savings or finances and get gains in return. One such short term financial instrument is a Certificate of Deposit or CD

What is a Certificate of Deposit?

Certificate of Deposit is an agreement between an authorized bank or a financial institution and the depositor. The depositor can be anyone, from a common man to mutual funds, insurer and so on. This financial commodity is majorly sold by banks, credit unions and even thrift institutions. The concept of Certificate of Deposit is quite different from that of opening a Savings Account in a bank. You need to invest a certain amount of your savings or finances to the financial institution, who in turn will pay interest, giving you returns higher than the initial invested amount. However, you can only redeem a CD or Certificate of Deposit only after the term matures. You cannot withdraw the money before the specific term you have opted for, matures. Hence, a Certificate of Deposit is considered to be a time deposit, as it is time bound in nature.

A Certificate of Deposit offers fixed rate of interest and is for a fixed amount of time. It is like a term of one month, three or six months, or even for a term of five years. It requires a minimum amount of monetary investment. 

Certificate of Deposit were introduced in the financial market back in the year 1989 and was made available to the common man as a means of investing their savings and getting higher returns. The sole purpose of its introduction was to manage short term investments and to increase the range of various money marketing instruments available for the public. Certificate of Deposit is considered to be one of the safest and most popular ways of investing and getting quick and better returns to the market.

Why is Certificate of Deposit so important?

As mentioned earlier, Certificate of Deposit offer quick and short-term investments and help with increasing the cash flow in the money market. It has also been an important source of short-term investment for the common public. Being an important tool of investment, it offers an agreement between the depositor and the financial institution to decide about its tenure, the rate of interest and the final sum of amount. However, these are not the only features which make Certificate of Deposit so important and popular in today’s world. Here are a few points which can help you understand the importance of Certificate of Deposit in a better way. Some features of Certificate of Deposit are listed below.

  • Certificate of Deposit has a minimum investing criterion. However, they do have a tendency of offering higher than usual rate of interests in the deposited sum of amount. Hence, it is beneficial for you if you are planning for a comparatively shorter term of investment with better returns. But ensure to confirm the minimum amount required to be eligible for opting for the Certificate of Deposit.
  • Not all financial institutions can issue a Certificate of Deposit. Depending on the fiscal policies, the terms for Certificate of Deposit keep evolving. However, the one thing which remains intact is the safety with which you can choose to invest in Certificate of Deposit. This only goes to prove that a CD is not only genuine but also in line with the policies offered by the government.
  • An individual, trust funds, mutual funds, pension funds and insurers are eligible for Certificate of Deposit, especially by the Bank.
  • The fixed tenure for a Certificate of Deposit further adds to its credibility.
  • You also have the right to delay the withdrawal of a Certificate of Deposit, leading to an extended period and in turn higher rate of interests.

Having discussed in length about Certificate of Deposit, it is now important to understand its various advantages and disadvantages.

What are the advantages of Certificate of Deposit?

Now that you have understood the concept of Certificate of Deposit. It is imperative to also understand its advantages and disadvantages. Based on these evaluations, will you be able to make a choice and opt for investing for a Certificate of Deposit.

Here are a few advantages of Certificate of Deposit listed out for you:

  • Easy to open: Certificate of Deposit is offered by financial institutions. Be it your bank, the credit union, you are free to choose the financial institution which you are the most comfortable working with and opt for opening a Certificate of Deposit. Hence, easily accessible and available for you.
  • A safe mode of investment: Since financial institution like banks, credit unions and certain thrift institutions only can issue Certificate of Deposit, you feel assured that your money is in safe hands. Such money market instruments ensure for a safer returns and growth in turn. You get a paper certificate or a simple book entry by the bank or the financial institution to verify your invested amount. At times even no certificates are issued, in such a scenario, you can download and print the same by making use of the online website for the financial institute.
  • Better returns: In case of Certificate of Deposit, the amount to be issued during the time of its maturity is already decided. Considering the rate of interest is fixed, and comparatively higher, you are assured of better returns to the end. Also, if you choose to delay the withdrawal, Certificate of Deposit is bound to generate high returns for you.
  • Flexibility in terms of investment time: You have the flexibility to choose the time frame or the term for the amount you wish to invest for Certificate of Deposit. You have an option for opting for a few months to a few years. Hence, giving a sense of flexibility to your investment while under Certificate of Deposit. Even though you choose a shorter term of investment, the amount of return will remain the same considering the rate of interest remains fixed.
  • Grace Period: Once your invested amount matures, you get a grace period of 7 days. In this time, you can decide whether to continue with the investment or to withdraw the entire sum of investment in Certificate of Deposit. You can further choose to either withdraw or delay the withdrawal by continuing to invest further in Certificate of Deposit.

What are the disadvantages of Certificate of Deposit?

Having listed out the advantages of Certificate of Deposit, it is only imperative to also look at its disadvantages. You must, after all, be aware of the pros and cons before investing your money in Certificate of Deposit.

Here are a few disadvantages of Certificate of Deposit for you:

  • Limited access to your funds: Certificate of Deposits are not as easily accessible as the traditional Savings Account. This means, you will not be able to access the invested amount before the term matures. If you wish to access the invested amount before the term matures, you will have to face a penalty for the same. This is one of the major disadvantages or drawbacks of opting for a Certificate of Deposit.
  • Early withdrawal penalties: Limited access to funds is one of the major drawbacks of Certificate of Deposit. However, in case of emergencies, if you need full access to your investment and opt to withdraw it, you will have to face with the penalty fees for the same. Before the term matures, it is always advisable to not try to access the Certificate of Deposit or withdraw it.
  • Fixed Rate of Interest: Being one of the highlights and an advantage for Certificate of Deposit, the fixed rate of interest also seems to add to its disadvantage. If in the money market, the rates of interest go high, you will only be eligible for the fixed rate of interest you had opted for when you chose the Certificate of Deposit. The rate of interest will remain, in such a scenario, low for you.
  • Lower Returns: As discussed earlier, the returns offered by Certificate of Deposit is any day better than the returns you get from your regular Savings Account. However, there are many financial instruments available which will offer you a better return than the Certificate of Deposit. The number of options available for you to invest your savings in the money market are varied and this becomes a disadvantage for Certificate of Deposit.

Templates for Certificate of Deposit

Template 1

[Date]

[Name of Bank / Financial Institute]

[Address of Bank (line 1)]

[Address of Bank (line2)]

[Phone number or email address]

Dear [Name],

This letter along with the enclosed financial statements are to certify that I, [your name], has been a faithful client with your institute since [Year] and am in good standing.

I, currently have xxx[Amount] in my Savings account with your bank and would request xxx[Amount] to be invested in your Certificate of Deposit. I would appreciate if you can fast-forward the process and share the terms and conditions. Accordingly, I can further my decision for investing with your bank.

Please feel free to contact for any further concerns or queries.

Awaiting your response.

Yours sincerely,

(your name)

(your contact number)

(your bank account number)

Sample #1 Letter for Certificate of Deposit

Template 2

[Date]

[Name of Bank / Financial Institute]

[Address of Bank (line 1)]

[Address of Bank (line2)]

[Phone number or email address]

Dear [Name],

I, [your name] would like to invest in your financial institution. I have to know about Certificate of Deposit, And I am willing to invest a sum of [amount] for [term – in months or years]. Further I would like to know about the current rate of interest to proceed with the procedure.

Please reach out at my given contact information to further the process. Also, Please share the document for the terms and conditions your institute is currently offering for Certificate of Deposit.

Looking forward to your response.

Thanks and regards,

[your name]

[your contact number]

[your email id]

Sample #2 Letter for Certificate of Deposit

Template 3

[Date]

[Name of Bank / Financial Institute]

[Address of Bank (line 1)]

[Address of Bank (line2)]

[Phone number or email address]

Dear [Name],

I, [your name], have come to know about the benefits offered by your financial institute through Certificate of Deposit and would like to invest in the same. I am writing this letter, to show my interest in the process and know more as to how I can go about it.

Kindly guide me so that even I can benefit from the Certificate of Deposit.

Awaiting your positive response,

Yours sincerely,

(your name)

(your contact number)

(your email id)

Sample #3 Letter for Certificate of Deposit

Template 4

Dear [Customer Name],

[Name of Bank/ Financial Institute] are glad to welcome you in our family of over [number] members. We understand you have interest in Certificate of Deposit and would like to invest in the same.

Certificate of Deposits or CDs are a safe way to get higher returns in comparatively less amount of time. And we encourage all our potential clients to first go through the terms and conditions before applying for the same. Please find attached a copy of the same for your kind perusal.

Please feel free to reach out to us for any further concerns or queries.

Yours sincerely,

(Banker name)

[Banker title]

(contact number) (email id)

Sample #4 Letter for Certificate of Deposit

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