Most individuals with a conservative approach towards investment typically consider investing in debt instruments offering stable returns and capital preservation features. Of the various debt instruments in the market, a certificate of deposit and a savings bank account are two important instruments.
As savings accounts are often an initial point of financial contact, many tend to be aware of the benefits of savings and usually opt for them for most of their short-term savings needs. However, certificates of deposit, like savings accounts, also come with their own set of benefits and features, which you must be aware of to make an informed decision linked with savings to accumulate a specific corpus. Discussed here is a comparative analysis between a certificate of deposit and a savings bank account –
What’s a certificate of deposit?
A certificate of deposit is a kind of money market debt instrument. This financial instrument is backed by the RBI (Reserve Bank of India). A certificate of deposit is a kind of agreement between the bank and depositor, where the bank agrees to pay a specific interest constituent on the investment amount.
The instrument comes with a fixed investment tenure and amount. As an investor or depositor, you must remain invested for the period, after which you can liquidate your investment. Note that, unlike fixed or recurring deposits, you cannot liquidate your certificate of deposit before the predetermined maturity period. While there’s no liquidity benefit available in the certificate of deposit before maturity, a crucial advantage for considering this debt instrument is the provision of higher interest returns.
What’s a savings bank account?
A savings bank account is a vault that allows you to park your surplus funds, which you can withdraw at any time, depending on your needs. So, unlike a certificate of deposit, you can access funds parked in savings accounts anytime. However, this is just a small aspect of a savings account. There are different variants of saving accounts that may offer higher benefits in the form of provision to earn higher savings account interest, free virtual debit cards, lifetime free credit cards, complimentary talk time offers,
flexibility in balance maintenance, preferential interest rate pricing on loans, enhanced cash withdrawal and deposit facility, etc. With a savings account, you can receive and make payments, invest in distinct financial instruments like fixed deposits, recurring deposits, mutual funds, etc., and earn higher returns. You can even use this account to pay your utility bills and recharge your phone number.
Owing to technological development and the acceptance of digitalization, you do not need to personally approach your preferred bank’s branch to open a savings account. You can open this account simply by hitting the online saving account opening option on the preferred bank’s website. Also, note that the documents required for bank account opening are minimal. Basic documents include your identity proof, address proof, signature proof, and your latest passport-size photos.
Savings account or certificate of deposit – Which is a better choice?
The choice between a savings account and a certificate of deposit depends on your financial goals and objectives. For instance, if you want to form an emergency fund, you must open a savings account if you are looking for high liquidity and stability.
However, on the other hand, if you are looking to meet a short-term goal like creating a corpus for vacation abroad or arranging a down payment for a loan, and if you can tolerate slight risk, then a certificate of deposit is a better choice in this case than a savings account owing to its potential to generate higher returns.
