Investors often look for safe and reliable options to grow their savings while ensuring a guaranteed return. Two of the most popular choices are Certificates of Deposit (CDs) and Fixed Deposits (FDs). Both options allow you to invest a lump sum at a fixed interest rate, but they differ in terms of flexibility, accessibility, and potential returns.
Certificate of Deposit vs Fixed Deposit
| Feature | Certificate of Deposit (CD) | Fixed Deposit (FD) |
|---|---|---|
| Definition | A short-term money market instrument issued by banks and financial institutions | A financial instrument offered by banks and NBFCs to deposit money at a fixed interest rate |
| Minimum Investment | Usually starts from ₹1 lakh | Starts as low as ₹1,000 |
| Tenure | 7 days to 1 year (banks), up to 3 years (financial institutions) | 7 days to 10 years |
| Interest Rates | Often slightly higher than FDs | Fixed but varies based on tenure and bank |
| Liquidity | Cannot be withdrawn before maturity | Can be withdrawn early with a penalty |
| Loan Facility | Cannot be used as collateral | Can be used as collateral for loans |
| Insurance | Not insured by DICGC | Up to ₹5 lakh insured by DICGC |
Both Fixed Deposits and Certificates of Deposit are excellent investment options depending on your financial goals. If you’re looking for a safe, flexible, and long-term investment, FDs are the better choice. On the other hand, if you have a higher investment amount and can lock in your funds for a short period, CDs offer slightly better returns.
What is a Fixed Deposit (FD)?
A Fixed Deposit (FD) is one of the most common savings instruments offered by banks and Non-Banking Financial Companies (NBFCs). It allows investors to deposit a lump sum for a predetermined period and earn interest at a fixed rate. FDs are considered safe because they provide predictable returns and are insured up to ₹5 lakh by the Deposit Insurance and Credit Guarantee Corporation (DICGC).
How Does a Fixed Deposit Work?
- Choose a tenure ranging from 7 days to 10 years.
- Deposit a minimum amount (varies by bank, usually ₹1,000 or more).
- Earn interest based on the chosen tenure and bank’s policy.
- Withdraw at maturity to receive the principal and interest.
- Optionally, use the FD as collateral for loans.
Advantages of Fixed Deposits
- Low risk: Government regulations ensure safety.
- Flexible tenure: Short and long-term options available.
- Loan facility: Can be pledged as collateral.
- Guaranteed returns: Interest rate is fixed.
- Tax benefits: 5-year tax-saving FDs offer deductions under Section 80C of the Income Tax Act.
Disadvantages of Fixed Deposits
- Lower liquidity: Early withdrawal incurs penalties.
- Taxable interest: Interest earned is subject to TDS (Tax Deducted at Source).
- May not beat inflation: FD returns can be lower than inflation rates.
see also: Take a Cheap Loan from Post Office RD
What is a Certificate of Deposit (CD)?
A Certificate of Deposit (CD) is a short-term investment instrument issued by banks and financial institutions to individuals, corporations, and high-net-worth individuals (HNIs). CDs are similar to FDs but have a higher minimum investment requirement and cannot be withdrawn early.
How Does a Certificate of Deposit Work?
- Purchase a CD from a bank or financial institution.
- Choose a tenure between 7 days and 1 year (for banks) or up to 3 years (for financial institutions).
- Earn higher interest rates than FDs.
- Redeem only at maturity—no premature withdrawals allowed.
Advantages of Certificates of Deposit
- Higher interest rates: Often better than FDs.
- Short-term investment: Ideal for quick returns.
- Reliable and safe: Offered by reputable banks and institutions.
Disadvantages of Certificates of Deposit
- High minimum investment: Usually ₹1 lakh or more.
- No early withdrawal: Locked in until maturity.
- No loan facility: Cannot be used as collateral.
- No DICGC insurance: Slightly higher risk than FDs.
Key Differences: Fixed Deposit vs Certificate of Deposit
1. Investment Amount
- FDs: Require a lower minimum investment, making them more accessible.
- CDs: Have a high entry barrier, typically requiring ₹1 lakh or more.
2. Liquidity
- FDs: Can be withdrawn before maturity (with a penalty).
- CDs: Cannot be withdrawn before maturity.
3. Tenure
- FDs: Offer longer tenures (up to 10 years).
- CDs: Typically short-term (7 days to 1 year for banks, up to 3 years for financial institutions).
4. Safety & Insurance
- FDs: Insured up to ₹5 lakh by DICGC.
- CDs: Not covered by DICGC.
5. Returns
- FDs: Offer steady but slightly lower interest rates.
- CDs: Provide potentially higher returns for short-term investments.
Which One Should You Choose?
Choose a Fixed Deposit if:
You need a low-risk investment. You want flexible tenure and liquidity. You prefer DICGC insurance protection. You might need to use it as collateral for a loan.
Choose a Certificate of Deposit if:
You have a large amount to invest (₹1 lakh or more). You don’t need early access to your money. You want higher short-term returns.
see also: 5 Government Schemes That Offer Higher Interest Than FD & Tax-Free Earnings
Certificate of Deposit vs Fixed Deposit FAQs
1. Can I withdraw a Certificate of Deposit early?
No, CDs do not allow premature withdrawals. You must wait until maturity.
2. Are Fixed Deposits safer than Certificates of Deposit?
Yes, because FDs are insured up to ₹5 lakh by DICGC, while CDs are not.
3. Do CDs or FDs have better returns?
CDs often offer higher returns for short-term investments, while FDs provide steady long-term growth.
4. Can I use an FD as collateral for a loan?
Yes, banks allow loans against FDs, often up to 90% of the FD value.
5. Are CD interest rates fixed?
Yes, but some financial institutions offer floating rate CDs linked to market benchmarks.
