Five tips to select an appropriate CD

People who are willing to invest in a low risk product mostly choose the CD. These CDs (certificate of deposit) are a type of deposit in a bank, which provides better rate of interest to the depositor comparing to a regular SB account. Moreover, it comes with federal deposit insurance of $250,000, which adds more safety to the investor. During this recession period with a volatile market, CDs seem to be a good option.

Set a financial goal

Set a goal for your future financial requirements. Try to predict your future needs. Seek a financial professionals help, if you are not good in these things. Financial planning is necessary for a better and safety future. The first thing you need to figure out is your risk tolerance. Selection of a financial product largely depends on your risk tolerance. Making a diversified portfolio is always advisable. While calculating the returns do not forget to calculate the inflation erosion. Your investment returns should outpace the inflation rate.

CDs maturing date

Make sure you know the date of your CDs maturing date. Before you buy a CD of your choice, ask to see your CDs maturing date in writing. Anyhow, you would not be happy to end up with a ten year CD, where you actually thought to buy a five-year CD. Pre closing a CD usually attracts some penalty.

Callable CDs

You might not a get a full interest rate for the whole period of your CD if it has any call features. In this case, the bank can terminate the CD if the interest rate falls down. The bank has this right and you do not have any such right. After the CD is canceled you will get your original money deposited and with any accrued unpaid interest available. Then you have to shop around to buy a new CD with a low interest rate available at that time.

What is the rate of interest?

Get documents from the bank stating the interest rate of your CD. Unless you see it in paper, it is not reliable. Also, find out how the interest is calculated. Is it fixed rate or variable rate? When will be the interest paid to you? How will they pay the money to you? Is it by electronic mode or by cheque? Clearing all doubts while you buy a CD is necessary part of your wise investments.

Change in rate of interest

Variable rate CDs interest rate will change from time to time. The change is not uniform for the entire variable rate CDs. There are a few types, which you need to understand. Some variable CDs will track a particular market index. For example, they may follow the Dow Jones or the S&P 500. So the rates will be determined by that market index. However, if the CD is following a “bonus rate” structure or a “multi- step” structure then they are pre scheduled to increase or decrease. Make sure you are aware of these features when you go for a variable rate CD.