Investing in corporate FDs? Know the pros and cons

Even though there are many ways to invest, Bank Fixed Deposits (Bank FDs) are still the choice of many investors who don’t want to take risks. It is a favorite in every Indian home because it is easy to make.

But did you know that you can also put money into certain companies and non-banking finance companies (NBFCs)? This kind of deposit is called a Corporate Fixed Deposit (Corporate FD).

Fixed deposits are a convenient way for many companies and NBFCs to get money. Corporate FD gives fixed and predictable returns, just like a Bank FD. Also, unlike the returns on debt instruments, the returns on Corporate FD are not affected by changes in the market for interest rates. Most corporate fixed deposits have terms that last from 1 to 5 years.

Corporate FDs give 0.5% to 3% more interest than Bank FDs for identical maturities. Some Corporate FDs pay 7-8%. After locking in a deposit rate, you’ll get it till maturity. You can borrow 75% of your corporate fixed deposit.

Individuals, NRIs, and seniors over 18 can invest in Corporate FD. Corporate FDs provide 25-30 basis points greater rates to seniors (those above the age of 60). Guardians can help minors open accounts. By submitting a form and KYC details, you can deposit offline or online.

State bank of India, India’s largest public sector bank currently provides an interest rate of 5.3% per annum for fixed deposits of 3-year to 5-year tenure. Meanwhile, Bajaj Finance, one of the leading NBFCs in India currently provides an interest rate of 6.5% per annum for a similar tenure

India’s largest public sector bank, State Bank of India, pays an interest rate of 5.3% per year on fixed deposits with terms of 3 to 5 years. One of the most important NBFCs in India, Bajaj Finance, offers an interest rate of 6.5% per year for the same length of time.

Also, Read:5 ways to save money on taxes to think about

Table: Bank FD v/s Corporate FD interest rate comparison

Tenure (months)Bajaj FinanceState Bank of India

Are corporate fixed deposits safe?

All NBFCs and companies that want to take deposits have to follow the RBI and Ministry of Corporate Affairs’ strict rules and guidelines (MCA). Because of this, only a few can take deposits from regular investors.

Ratings are given to corporate FDs by groups like CRISIL, CARE, and ICRA. People think that deposits with the highest rating, AAA, are safer than those with the AA, A, or BBB rating. It’s important to know that only companies with a BBB rating or higher (above investment grade) can accept deposits. Even though these steps help reduce the risk, that doesn’t mean they are “risk-free.”

company’s finances get worse, its Corporate FD can be at risk of default. When this happens, it can be hard for the company to pay out interest or, in the worst case, even the original loan amount.

Ratings aren’t always reliable. Example: DHFL fixed deposit. The company’s problem two years ago lowered its FD from ‘A’ to ‘BBB-‘ and then to ‘D’ It halted new deposits, renewals, and early withdrawals. The company went bankrupt. The corporation hasn’t returned the depositors’ money.

In the past, a few other companies have also not paid their interest. And because of the pandemic, it’s likely that the financial stress on some companies has grown. So, it’s important to be careful when choosing Corporate FD. Choose only those with a “AAA” rating to reduce the risk of default.

Benefits of investing in Corporate FDs:

  • Fixed deposits are the safest investment for those who fear capital market dangers and uncertainty. FD rate changes only affect new investors. Corporate and HFC fixed deposits offer a greater interest rate.
  • Investors have less to worry about because their deposits are locked for a specified number of years, during which they can choose non-cumulative interest payments — monthly, quarterly, half-yearly, or annually — or cumulative, where the principal and total interest is paid out on maturity.
  • The power of fixed deposit lies in compounding, where the money earned over a period is reinvested
  • Many deposit-taking corporate houses and housing finance companies offer fixed deposits through a nationwide network of brokers and relationship managers. PNB Housing’s customer portal lets you access account statements, ask questions, and live chat with officials. Auto-renewing deposits are also available.

Know these three risks before investing in corporate FDs

Indian households often invest in bank fixed deposits. Given the drop in bank FD rates to 5%, investors are looking for better returns elsewhere. Financial experts advocate AAA-rated corporate fixed deposits to such investors but warn them to be cautious. Corporate FDs aren’t insured like bank FDs. AAA-rated corporate FDs like HDFC Ltd, and ICICI Home Finance Ltd provide 1-2 percentage points more than a bank FD.

An investor should be wary of these three risks of investing in corporate FDs :

Default risk: Corporate FDs are not guaranteed like bank FDs. These instruments don’t promise to protect the capital or pay interest. If a company is having trouble making money, an investor could lose his money.
Unattractive post-tax returns: The interest on corporate FDs are added to the investor’s income and taxed according to the investor’s income tax slab rate. Corporate FDs don’t look good for people who are in the highest tax bracket.
Premature withdrawal attracts a penalty:- Most firm FDs have a three-month lock-in period when investors can’t withdraw money. Withdrawing before maturity after the lock-in period means closing the FD. No partial withdrawals. A withdrawing investor will also lose some interest. The investor’s income is taxed at the appropriate rate. High-tax bracket taxpayers should avoid corporate FDs.

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