Fixed Rate of Deposit v Certificates of Deposit

In an unpredictable economy, it is important to carefully weigh the various investment opportunities before making a final decision. Although similar, there are several key distinctions between fixed rate deposits and certificates of deposit (CD), chiefly revolving around liquidity and interest rates. However, these two types of investments share a similar overall structure.

Rather than a variable type of an investment like a money market account or a mutual fund, in which an investor can deposit and withdraw funds at will, fixed rate deposits and CDs each involve a single initial deposit of funds, which then earns interest over a set period of time. Also unlike a money market account or similar products that fluctuate with the market and the investment acumen of the financial institution's investors, both the CD and fixed rate deposit have a set interest rate the investor will earn regardless of fluctuations in the market. There are hundreds of financial products available, but few can match the stability and security of fixed rate deposits and CDs.

However, there are major differences between these two types of investments. A certificate of deposit is limited in liquidity, with the initial deposit meant to remain in the bank's possession until the end of the term, often six months to a year. Only ten percent of the investment remains liquid and therefore it is available for withdrawal only through payment of a large penalty. Such accounts are designed to mature without interference. A fixed rate deposit often has greater liquidity than a certificate of deposit, with a thirty percent reserve maintained to service any withdrawal requirements. With three times the reserve of a certificate of deposit, fixed rate deposits are a strong choice for investors who may be uncertain about their future needs and allow them to access the liquidity of their investment.

A substantial disparity in rates is another major difference between fixed rate deposits and CDs. Because CDs are stable investments without much liquidity, banks cannot afford to grant high rates to the investor, often hovering between one and two percent. The price for a stable and secure investment is traditionally a lower rate, but not so with fixed rate deposits. Depending on the term of the investment, the fixed rate deposit offers rates two to three times higher than those offered by most banks on their CDs, generally from 2.25% to 4%. The rates of fixed deposit investments provide investors a leg up on the competition afforded by CDs.

Both CDs and fixed rate deposits offer safe and secure investments, providing a hedge against the dangers of a volatile market while granting a sure return on investment. The fixed rate deposit, however, goes a step further, offering significantly higher rates while maintaining a larger reserve for liquidity if the need for an early withdrawal should arise. The fixed rate deposit offers the benefits of a CD while overcoming some of its shortcomings to provide an excellent financial product for any careful investor.