By 
Bank Deposit Certificates (CDBs) are a popular form of fixed income investment commonly found in banks and brokers. They are often among the first investment choices for those transitioning from traditional savings accounts to explore other financial products.
Do not overlook CDBs even if you are a more daring investor, as some financial institutions such as brokers provide CDBs with higher returns compared to banks.
Keep reading to learn about CDB, including what they are, how they function, different types, benefits, drawbacks, and more. By the end, you’ll be equipped to decide if adding this product to your portfolio aligns with your profile and select the best investment option for you.
What does CDB stand for?
The CDB is a classic fixed income choice issued by financial institutions to attract investment, functioning much like government bonds.
Investing in Direct Treasury means lending money to the government for various projects, while investing in CDBs involves lending money to banks for their daily operations.
The investor first purchases a CDB by depositing a set amount with a financial institution. This amount is then lent to the bank for a predetermined period, and in return, the bank pays interest to the investor for the duration of the investment.
1/3 of the funds held in CDBs cannot be borrowed, serving as a means to regulate the outflow of money in the economy by requiring it to be deposited with the Central Bank.
How does CBD function?
Earning potential
CDB with a fixed rate
The fee for a pre-fixed investment is determined when you apply and stays constant until the investment matures, ensuring a fixed return.
In post-fixed investments, the earnings are linked to an index like CDI or Selic, causing the returns to fluctuate based on the index’s movements, making it difficult to predict the exact investment return.
Post-fixed Certificate of Deposit
When discussing indexers in CDB investments, the CDI is typically the most popular choice. In this scenario, the return is often a percentage of the CDI. For instance, a CDB yielding 110% of the CDI would generate an income of 110% based on the CDI return for that year.
When discussing post-fixed CDBs, investors may opt for a payment method known as CDI + spread (e.g. CDB + 3% a.a.), where the profitability can vary based on fluctuations in the chosen index, such as CDI.
Inflation-linked CDB.
The inflation-linked CDBs combine a predetermined interest rate (e.g. 4% per year) with a variable component tied to an inflation index such as IPCA or IGP-M.
Some locations alter this form of CDB, such as the progressive CDB, in which the investor’s payout is determined by the duration the money remains in the investment.
Which one should be selected now?
It all hinges on your objectives and investor profile. CDBs combining an index fund with another are more suitable for long-term investors, whereas money market funds are better for individuals requiring quick access to build emergency funds.
IR stands for Income Tax.
The tax on CDB is based on a regressive table, which means that the longer you keep your investment, the lower the tax rate.
The IOF collection is applicable only when you withdraw investments within 30 days, and the percentage decreases as the investment duration increases.
Initial capital investment
When beginning to invest in CDBs, it is typical for some financial institutions to demand a set minimum initial investment, which can differ based on the risk level and potential profitability of the product.
In bigger banks, you can typically find CDBs with a minimum value of around R$100, but they may offer lower returns as well. CDBs that yield less than 100% of the CDI are not a good investment option.
Brokers or other investment platforms offer a wide variety of options with different types of rewards, bringing together various types of CDBs from different institutions in one place, providing more choices for investors.
CDB characteristics
In the financial market, there are various types of CDB available, each with unique features and terms, providing you with options to select the most suitable CDB for your financial requirements and objectives.
maturity
CDBs can differ based on the maturity of the title, with short-term ones lasting up to a year, medium-term ones ranging from one to five years, and long-term ones exceeding five years.
The length of time until maturity affects how profitable an investment is, with bonds that have longer terms typically providing higher interest rates to make up for the extended period that the investor’s money is tied up.
Daily availability of funds
When selecting a CDB, it’s important to think about how easily you can access your funds. Some CDBs allow you to withdraw money at any time without penalties, while others only allow withdrawals at the end of the term.
CDBs are investments with a maturity date, meaning that agreed terms are only guaranteed if the investor keeps the money invested until the agreed date. However, this is not a concern for those with daily liquidity options, as they can withdraw funds at any time without any negative impact.
Some CDBs may have restrictions on daily withdrawals if there is a minimum period where money cannot be redeemed.
Clearance upon reaching maturity.
There are also CDBs that require you to wait until maturity to withdraw your funds, similar to other traditional financial products. In this scenario, you are unable to access your money before the agreed-upon date, but you receive a higher return compared to CDBs with daily liquidity.
There are various maturity options available, including short-term ones that can be redeemed within a year, and long-term ones that mature over two to five years or even longer. The latter are particularly suitable for long-term investors.
I required the money, so what?
You can sell the CDB to other investors in the secondary market at market price, but there is no guarantee of avoiding potential losses in the process.
The decision between daily liquidity and maturity options is based on individual needs, considering their resources and long-term strategy.
Expenses
CDBs do not have an administration fee, but there may be charges for brokerage and custody in some cases, although many institutions offer these services for free.
Benefits of investing in CDB
Investing in CDBs involves various pros and cons that investors should weigh up prior to making an investment.
Credit Guarantee Fund (FGC) – Fundo Garantidor de Crédito
The security offered by the Credit Guarantee Fund (FGC) is a key benefit of CDB, as it guarantees investments of up to R$250,000.00 per individual and per financial institution in the event of insolvency.
Even if the CDB issuer defaults, investors are assured of receiving their invested amount up to the defined limit by the FGC, making CDB a secure choice, particularly for risk-averse investors.
Investment that is easily accessible
CDB investment offers easy access through various financial institutions, catering to investors of all types with varying investment amounts.
The process of investing is typically straightforward, involving just opening an account at a financial institution and depositing the desired amount.
Return predictability
It provides the benefit of predetermined return predictability, such as a fixed interest rate set during the application process, in addition to security and accessibility.
Downsides of investing in Certificate of Deposit
Nevertheless, despite the numerous benefits, there are also drawbacks that need to be taken into account.
Liquidity variability
Some CDBs offer liquidity upon maturity, restricting investors from redeeming their investment before the set period ends, which may not be suitable for those requiring immediate access to funds or flexibility to adjust investments based on market conditions.
Interest rate and inflation are closely linked.
CDB returns can be influenced by market interest rates and inflation. When interest rates are low or inflation is high, CDB returns may not keep up with increasing prices, leading to a decrease in purchasing power in the long run.
Assessing the hazards of CDB
Credit risk refers to the possibility of loss due to a borrower’s failure to repay a loan or meet their financial obligations.
One of the primary dangers linked to investing in CDB is credit risk, as there is a chance that the bank issuing CDB may not fulfill its financial commitments despite being backed by the FGC. This is particularly concerning when dealing with financially unstable institutions.
Always make sure to thoroughly examine the credit risk information of the location you plan to invest in. Higher credit risk typically correlates with increased profitability potential but also higher risk. Remain vigilant!
Market risk refers to the risk of financial loss due to changes in market conditions.
CDB returns are influenced by market risk, particularly for post-fixed yields. Changes in reference indices can affect investment returns, resulting in less predictable yields. Consequently, investors may experience losses or gains based on market conditions during the CDB term.
Investing in CDB: A Guide
Establish your financial objectives
It is crucial to comprehensively know your financial objectives before investing in any product, including CDBs. Assess whether you are aiming for short, medium, or long-term goals and your willingness to keep your money invested to make informed investment decisions and choose the appropriate type of CDB.
Explore the various choices that are currently accessible.
Once you establish your financial objectives, you should explore the various CDB options in the market. This involves analyzing factors like interest rates, maturity periods, types of interest (fixed or variable), liquidity, and the reputation of the financial institution. Compare different options and consider your individual circumstances before making a choice.
Create an account at a bank.
To invest in a CDB, you must create an account with a financial institution that provides this investment option. Ensure to review the account opening criteria and investment procedures at the designated institution.
Select the suitable Certificate of Deposit (CDB).
Select the most suitable CDB based on your research and financial objectives, taking into account aspects like maturity, interest rate, and liquidity. Be sure to compare offerings from different financial institutions to find the best terms for your needs.
Keep an eye on the boundaries of the FGC.
The FGC has a coverage limit of R$250,000 per CPF and institution, leading experts to suggest diversifying investments across various products and institutions to increase the warranty amount. Despite this, the FGC implemented a new general guarantee limit of R$1 million in 2017, which is renewed every four years. This means that even with diversification, the maximum coverage over four years remains at R$1 million.
Execute the task.
After selecting the right CDB, the next phase involves completing the investment application. It is essential to supply all required details and adhere to the institution’s specific procedures to finalize the application successfully.
Monitor and keep track of your investment.
It is crucial to consistently monitor the performance of your CDB investment by regularly checking your account to verify that it is performing as anticipated after making the initial investment.
Adjust your strategy as necessary
It is crucial to periodically reassess your CDB investment plan and make necessary changes such as adjusting the portfolio, transferring cash between various investments, or considering early CDB withdrawal.
Conclusion
The CDB is a cost-effective and relatively secure investment option in the financial market. It’s crucial to understand the risks before investing and align your analysis with your financial objectives to enhance potential returns.
Comments