Certificates of deposit are a good idea generally, as they are insured by the federal government for up to $250,000 more than other deposits, and once they are bought, they require very little in the way of follow up. While they do not provide a spectacular return on investment, they can certainly throw off some respectable income over their life spans. They, like many other investments, have become more complicated in recent years, and there are some crucial aspects that need to be paid attention to. The following CD tips are designed to assist the investor in maximizing the return on her investment both by buying correctly and by avoiding pitfalls that can reduce or cancel part or all of her gains.
The longer the term of the CD is, the higher the interest rate will be. Deciding how far out to buy is a bit tricky, as the interest rate the investor locks in can end up being an above average return on investment if interest rates fall in the interim, and conversely, be an under-producing one if interest rates rise in the same time. If the investor is definitely going to need the money relatively quickly, then the decision is easy-buy the highest interest rate for the time period in question. Otherwise, the investorâ€™s best judgment will have to guide her in the choice of maturity period. The maturity date must be very much in the investorâ€™s awareness once the CD is bought, as many CDs have an automatic rollover feature that can lock the investor into a lower interest rate than she might want. Not knowing this can cost the investor dearly in return on investment, both in actual loss of cash return and in opportunity cost. CDs nowadays also come with a â€œcallâ€ feature, which means that the issuing bank can â€œcallâ€ the CD back after a period of time, which they would do if interest rates has fallen since the purchase (the two aspects â€œmaturity date,â€ and â€œcall periodâ€ are not to be confused-a call period of one year can be attached to a CD with a fifteen year maturity date).
Rounding out these CD tips, the investor might have to balance the need for a high rate of return with the possibility that she will need funds sometime in the future but before a high-rate CD would mature. The answer might be to keep a certain sum in a â€œliquidâ€ CD, that is, a CD that will allow the investor to withdraw the funds before the maturity date without a financial penalty.