Fixed Deposits in India have always been a favorite mode of investment. Whether it is for short-term saving, guaranteed returns or low risk saving mode, FDs are always known for best saving investment options for common man. But from the last few years low bank FDs interest rates are reason to worry for short term investors and making people consider other saving options with high returns. If you are also one of them who is concerned because of FDs interest rates falling in, then no need to worry anymore. We will tell you about another better option which is Corporate Fixed Deposits.
Let’s know what corporate deposits are and how it is different from Bank FDs?
Corporate Fixed Deposits:
Just like bank fixed deposits several companies/corporates and NBFCs also collect and deposit money for fixed tenure and give interest. These companies and NBFCs' fixed deposits are known as corporate fixed deposits. Like other banks, Corporate FDs give a rate of interest on income and have similar flexible tenure to fix the amount. Corporate FDs always provide you a higher rate of return as compared to Bank FDs.
How is Corporate FDs different from Bank FDs?
The most important difference between the Corporate FD and Bank FD is that corporate FDs offer high rates of interest whereas Bank FDs offer low rates of interest to their customers.
The penalty period for early withdrawal is lower as compared to Bank FDs. As per RBI’s guideline if you withdraw money from the Fixed Deposits within the three months of tenure, you have to pay the penalty amount for early withdrawal of money. The Penalty charges and tenure depends on the NBFCs and Companies.
Similarly, Corporate FDs assure to give guaranteed fixed rates of interest at maturity. Suppose you have taken a loan from any NBFC, and they offered you an 8 percent rate of interest on the amount you deposited, like Rs 1 lakh. So, after the maturity of the Corporate FD will get an assured amount of Rs 1.08 lakh as guaranteed. No matter what inflation is and what the situation of the markets and economy are you will get the benefit assured to you.
“FDs opened with NBFCs, HFCs or other corporates do not qualify for any statutory guarantees. The risk of opening corporate FDs will primarily depend on the issuers’ financial capacity to honor interest and principal repayment of FDs,” said Sahil Arora, Senior Director, Paisabazaar.com
Who and why should one invest in Corporate FDs?
Anyone with short-term saving goals like going for an international trip, gifting a news car, buying something valuable for spouse or for any short-term financial and emergency needs then, Corporate FDs can be a good option.
Bank FDs offer low interest rates, but Corporate FDs will always give you a high rate of interest. The difference generally lies between 1 percent to 4 per cent. Corporate FDs generally pay 4% to 9% interest rates. Also, the lock in period as compared to bank FDs are of less tenure and interest rates paid are flexible. Also, Senior citizen can enjoy the benefit of extra interest rates.
Some facts about Corporate FDs:
One can also take an emergency loan against Corporate fixed deposits of up to 75% of the deposited amount. To select which Corporate FD companies are good and which are one should check the credit ratings of that company.
“Investors should also factor in the credit risk rating assigned by various credit rating agencies for corporate FDs. As these credit ratings are assigned on the basis of the overall financial health of the corporate FD issuers, investors can get a fair idea about the credit risk involved in opening corporate FDs by referring to assigned credit ratings,” Arora said.
Investors with low-risk capacity should avoid taking Corporate FDs because in case of a default from the corporate/NBFC side you will not be covered under the deposit insurance program where you will get a sum of Rs 5 lakh during failure of the company.
Whereas Fixed deposits opened with scheduled banks are covered under the Deposit Insurance Program offered by DICGC, an RBI subsidiary. Under this program, cumulative bank deposits of a depositor including his fixed, current, recurring and savings deposits for up to Rs 5 lakh with each scheduled bank are covered in case of bank failure.
“In the case of a corporate FD getting defaulted, you are not liable to receive anything. What you need to be mindful of is the credit rating, the term of the deposit and tax implications that come as a part of the investment,” said Milan Ganatra, CEO & Co-founder, 1SilverBullet.
So, Corporate FDs are usually taken by NBFCs (Non-banking and Finance Companies) and are likely to fetch you higher returns keeping in mind the risk is also higher. Essentially used to finance corporate business hence the interest rates and maturity term varies for each.
Do keep in mind that if the income under Corporate FDs exceeds 5000 rupees in a year, then it will be taxed as per the Income-tax rule.
Before choosing corporate FD, always keep in mind the credit rating of the company, company background, repayment history to define the stability and credibility of the company you are depositing your money in.
Therefore, investing money in a high rated corporate FDs with AA or AAA rating can be a good choice for investors with moderate risk. Else, only those investors having higher risk appetite and looking for higher yields from their FDs should opt for corporate FDs and earn better interest.
The bottom-line is Corporate FD gives you double protection by assuring fixed income and offers higher interest rates as compared to other banks. So, always choose wisely and earn high returns by depositing your money in a Corporate FD.