The Difference Between a Certificate of Deposit and a Fixed Deposit

Savings accounts are designed to help you build reserves of money for emergencies or major expenditures, like a new car or refrigerator. You want that money to earn as much interest as possible, but you also want it to be safe, so there is no chance of a loss like there might be with a securities investment. Fixed deposits and Certificates of Deposit, or CDs, give you a chance to save money in a safe place. Unlike traditional savings accounts, however, you will have to wait a set period of time to withdraw from many fixed deposit or CD accounts.

Certificates of deposit and fixed deposits (also called time deposits) have many similarities. Some banks even refer to fixed deposits as CDs. Both CDs and fixed deposits will pay interest more than "passbook" savings accounts, where money can be withdrawn at any time. The difference between the two is that certificates of deposit are freely negotiable, while fixed deposits are not.

CDs and fixed deposits in a bank or savings and loan are guaranteed by the Federal Deposit Insurance Corp. for up to $250,000 per institution. Some institutions offer higher rates on CDs with "call" options, which give the issuing bank the option to "call" or terminate the CD before its scheduled maturity. This protects the bank against having a portfolio of high-interest accounts if interest rates suddenly drop.

CDs typically are issued for periods of 30 days to five years. Rules vary with issuers, but many CDs hold interest until the certificate matures. Other CD issuers, and most fixed deposits, pay interest at some regular specified period, like every month. The holder has the option of taking that money out or leaving it in the account. Fixed deposits are also available in a variety of terms. For example, HSBC offers terms ranging from 12 to 48 months.

Some CDs are issued by stock brokerages or similar firms and often offer higher interest rates, but lack the federal insurance. Make sure you know the real issuer of the CD to ensure it is insured. If a CD is issued through a broker, find out who really issues it and holds the funds.

Many CDs and some fixed deposits have penalties for early withdrawal of funds, although some banks now offer "no penalty" CDs. Be sure you check these provisions before you put money into either a CD or fixed deposit. Fixed deposits that are not specifically CDs might have special withdrawal options, so an investor can take out a certain amount within a given time period. For instance, withdrawals might be limited to so many per quarter or to a certain percentage of the total account.

Some institutions now offer variable rate CDs or fixed deposits. These have time restrictions, but the interest rates can vary with changes in general interest rates, either up or down. This can change the value of the investment. With fixed deposits, you know what the rate will be for the duration of the contract.

Some CDs and fixed deposits have automatic renewals, so they start a new time limit at the original expiration. This can affect the availability of money if a two-year CD rolls over for another two years automatically. Check renewal provisions and at least make sure there is advance notice before any automatic renewal takes effect or you might find funds unavailable when you want them.