Certificate of Deposit CD
A Certificate of Deposit (CD) is a short-term, negotiable, money market instrument issued by scheduled commercial banks and certain financial institutions at a discount to face value. It is similar to a fixed deposit but is tradeable in the secondary market, which distinguishes it from a regular FD.
What Is a Certificate of Deposit?
CDs are issued by banks to raise short-term funds from the money market. Unlike a retail fixed deposit which is not tradeable, a CD can be bought and sold in the secondary market before maturity, providing liquidity to investors.
CDs are regulated by the Reserve Bank of India.
Key Features
– **Issuer**: scheduled commercial banks and select all-India financial institutions
– **Tenor**: minimum 7 days, maximum 1 year for banks (minimum 1 year, maximum 3 years for FIs)
– **Issued at discount**: like T-Bills and commercial paper
– **Denomination**: minimum Rs 5 lakh; can be in multiples thereof
– **Tradeable**: can be sold in the secondary market before maturity
– **No TDS**: since the return is in the form of discount at issue and not periodic interest, TDS applicability differs from regular FDs
CD vs Fixed Deposit
| Feature | CD | Fixed Deposit |
|———|—–|————-|
| Tradeable | Yes | No |
| Minimum amount | Rs 5 lakh | Rs 1,000 (some banks) |
| Issued at | Discount | Face value |
| Interest payment | At redemption (as difference) | Periodic or on maturity |
| Investor type | Institutional, large HNIs | Retail investors |
Who Invests in CDs?
CDs are primarily held by:
– Mutual funds (liquid and short-duration funds)
– Corporates parking short-term surplus
– Banks as investment instruments
– High-net-worth individuals
Practical Example
A bank issues a 3-month CD with face value Rs 1 crore at a yield of 6.5%. The issue price is approximately Rs 98.38 lakh. A liquid mutual fund buys this CD. After 3 months, the fund receives Rs 1 crore from the bank. The Rs 1.62 lakh difference is the return. If rates rise and the fund needs to sell the CD before maturity, it trades in the money market at the prevailing yield.
Key Takeaways
– A Certificate of Deposit is a short-term, tradeable, discount-issued instrument from banks
– It differs from a fixed deposit in being tradeable in the secondary market
– Minimum denomination is Rs 5 lakh, making it primarily an institutional instrument
– Liquid and short-duration mutual funds invest in CDs as part of their portfolios
– CDs give banks flexibility to raise short-term funds at market rates
