A Jumbo CD (certificate of deposit) is a high yield investment that requires at least a $100,000 initial investment. In most cases, jumbo CDs are purchased by a larger institution instead of the individual investor. Because of their very high required initial investment, most of these certificate of deposit accounts are purchased by banks and pension funds looking for stable investments.
There are some opportunities for the individual who is interested in purchasing these types of investments, provided they have the required $100,000 in capital to invest. Check with your local bank, credit union, or online bank for more information on these investments.
Low Risk vs. Low Liquidity
Just like a traditional high yield certificate of deposit, jumbo CDs are considered a very low risk investment. As long as the total balance of the investment falls at or below the FDIC insured amount, the entire principal is guaranteed (see below for more details).
The major downside, or risk as some investors may claim, is that investing in any type of CD ties your money up. Unlike investing in a savings account or even stocks, a certificate of deposit requires that the money remain in the account until the agreed upon term has expired. Those who need access to the money in the event of an emergency would have to pay a early withdrawal fee in order to get access to their money.
Investing $100,000 and not having direct access to it for months or years may not be an option for the individual investor. In many cases, the extra interest that could be earned is not worth the risk of having an investment with low liquidity for the average person.
FDIC Insured
In the past, the FDIC (Federal Deposit Insurance Corporation) would guarantee up to $100,000 per depositor per insured bank. Since these certificates of deposit require a minimum deposit of $100,000, most accounts were never insured for anything over the initial investment amount for individuals.
Since that time, the FDIC now insures each depositor up to $250,000 per insured bank making a jumbo CD much more attractive then in the past. Now, most of these types of investments fall well below the guaranteed insured amount.
Comparison to Traditional CDs
So are these larger certificates of deposit worth it? In a recent search I ran on Bankrate.com, I compared the national averages for a 1 year traditional CD versus a 1 year jumbo CD and found the following results -
- 1 year CD – 0.67%
- 1 year jumbo CD – 0.71%
While not a huge difference, the national average for a jumbo CD earned 0.04% higher than a traditional one. On a $100,000 investment, you would earn about $40 more per year choosing the jumbo CD.
Final Thoughts
Choosing jumbo certificates of deposit as an investment may not be an option for most individual investors. The minimum $100,000 initial investment prohibits most of us from being able to take advantage of the higher interest rates.
However, for those investors who have the available capital and don’t mind tying it up for several months or years, jumbo CDs can provide a slightly higher rate. Now that these types of investments are FDIC insured for up to $250,000 (instead of $100,000), there is virtually no risk other than not having immediate access to your money.
Related posts:
- What is a Jumbo Home Loan?
- 4 Places to Find the Highest CD Rates
- How Does a Certificate of Deposit Work?
- Earn Certificate of Deposit Interest Using Your Tax Return
- 5 Tips for Investing in a High Yield CD
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Although the fixed term component may not be for everyone, there are plenty of individual investors that live off of the interest from a CD portfolio. Historical low rates has played havoc with those earnings. One strategy is to invest in longer-term CDs with low early withdrawal penalties. You get the benefit of higher earnings and the cost to close when rates to go up isn’t that expensive.
@CD Rates Blog – Great point. I have noticed plenty of investment opportunities for low early withdrawal penalties. It gives the investor another option for finding slightly higher rates now and the opportunity to reinvest in higher rates in the future.
Wow! I can’t believe how low the CD rates are today! I assumed that a jumbo CD would yield at least 2%… What a pidly return…. $40 on $100k?