24 Pros and Cons of Certificate of Deposit

Certificate of deposit is quite an unpredictable concept even in today’s world. But, this is the exact reason why there are many such investors who indulge in them because they find it to be extremely compelling.

This is seen especially during the times of various uncertainties all over the world. If an individual is in search of a safe place wherein he or she can store all his funds for a particular period of time, then the certificate of deposit serves as the most reliable option. 

Benefits of Certificate of DepositDrawbacks of Certificate of Deposit
Ensures complete safetyProvides extremely limited liquidity
Provides better returns than savings depositsInvolves risk of inflation
Ensures fixed amount of returnsRisk of re-investment
Provides wide range of selectionCreates a burden of taxation
Provides extensive accounting optionsResults in relatively lower returns

Advantages of Certificate of Deposit:

• Ensures complete safety:

One of the best ways in which individuals can earn benefits from the certificate of deposits is the fact that it ensures complete security over a significant period of time. The users of the same can be assured that their funds are storedsafely over a significant period of time.

The certificate of deposits provided by the federally insured financial institutions and credit unions are backed up with complete guarantee from such banking systems. 

Provides better returns than savings deposits:

The account holders of certificate of deposits are not allowed to take their financial deposits back as per their choice and convenience.

Unlike savings bank account which allow one to do so at any moment’s notice, it is because of this reason that certificate of deposits are more valuable. The financial institutions are seen to pay such investors with a higher amount in exchange for storing their money for a particular period of time.

Ensures fixed amount of returns:

The certificate of deposits ensure a complete set of fixed as well as predictable returns. This is completely different from other deposit accounting systems.

The depositors can therefore rely upon the certificate of deposits so as to deliver a particular yield at a specific time. Even in situations where the interest rates are seen to undergo a downfall, the rate of returns pertaining to certificate of deposits will remain constant.

Provides wide range of selection:

The certificate of deposits are found to be readily available in a wide range of maturities as well as yields. They are generated from various banking institutions and credit unions. One can easily locate certificate of deposits in various aspects ranging from 1 year to 10 years.

Such extensive range of options definitely benefit the depositors to get hold of an appropriate certificate of deposits which can satisfy all requirements.

Provides extensive accounting options:

The interested depositors are provided with a wide range of options to finalize that particular account suitable for the certificate of deposits. There are certain banking institutions which offer a no-penalty kind of certificate of deposits.

They can serve as an ideal accounting option for all the savers who wish to earn a decent amount of interest. Such benefits can be earned without having to suffer from withdrawal of penalty.

Disadvantages of Certificate of Deposits:

• Provides extremely limited liquidity:

One of the biggest disadvantage of the certificate of deposits is the fact that the depositors cannot gain easy access to their financial deposits even in emergency situations.

In order to withdraw the money, they need to pay a particular penalty amount for such early transactions. Such penalties can be in the form of sacrificed amount of interests or due to some significant loss in the principal.

Involves risk of inflation:

The certificate of deposits can act as a drawback for many because they are seen to give rise to inflation risks. Such inflations can take place in a short span of time without allowing the depositors to think of certain alternatives to escape the penalties of the same. Hence, it results in significant amount of losses.

It is because of this reason that the investments made in the certificate of deposits can create a threat for a depositor’s money. 

Risk of re-investment:

In such situations where the interest rates are seen to undergo a gradual downfall, the users of certificate of deposits will definitely face a drawback. They will have to undergo the predicament of investing in lower-yielding ranges of certificate of deposits.

This will particularly take place during the time when their certificate of deposits will undergo a maturity. This is entirely referred to as the re-investment risk.

Creates a burden of taxation:

Another major limitation of certificate of deposits is the fact that their investors might suffer from a tax burden. The tax which one owes on the accrued interest rate could ultimately result in eating up the earnings of such individuals.

This can ultimately result in making such investments virtually ineffective. Such a similar issue is also seen to affect the savings account to a great extent.

• Results in relatively lower returns:

The certificate of deposits also acts as a drawback for many individuals who cannot earn a good amount of returns from the same. Such returns are seen to be typically lower as compared to some of the higher-risk oriented strategies.

They include the stocks as well as the ETFs. Such relatively lower returns therefore present a striking problem for the depositors to be subjected to opportunity risk. Over a significant period of time, it has been shown that the certificate of deposits have undergone various ups and downs.

Conclusion:

The concept of certificate of deposits has gained immense popularity in the present times because they have benefited a number of investors. It has catered to the requirements of such individuals of storing their money in a secure place for a considerable period of time.

However, this particular financial concept has its own positive as well as negative sides. The people are therefore advised to gain complete knowledge regarding the same and then take up the services of the certificate of deposits.

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