Fixed deposits (FD) are among the most popular low-risk investment options for earning higher interest on your corpus than in a savings bank account, irrespective of market fluctuations. Investors routinely choose FDs to mitigate the risks in their portfolios with a surety of growth.
FDs have been an all-purpose short-term investment option for personal needs like vacations, down payment for buying a car, family functions, education for children, home renovations, and more.
Banks offer attractive interest on FDs with different tenures. Apart from banks, various NBFCs offer fixed deposits with attractive corporate FD rates. Read further to know which one is suitable for you.
Other than bank fixed deposits, corporate fixed deposits (also known as company fixed deposits) are becoming quite popular because of their attractive features.
Like banks, many Non-Banking Financial Companies (NBFCs) and corporates offer to collect deposits for a specific tenure with a prescribed interest rate. These fixed deposits are called corporate FDs. You can choose your term and get guaranteed returns on these instruments. And the best part is that these corporate FD rates are higher than those on bank FDs.
Corporate FDs are similar to bank FDs in many ways.
The essential benefit that company fixed deposits offer is an assured return on your investment. The corporate FD rates you receive are fixed and guaranteed no matter how the market performs. At the end of your FD’s tenure, you get the return as promised to you by the issuing authority.
For example, if you invest Rs. 1 lakh for one year with an interest rate of 9%, you receive Rs. 1.09 lakh at the end of the year. Now that you know how much you will receive from your investment on maturity, you can plan where to use this money or reinvest it. Ultimately, this gives investors financial security.
Company fixed deposits allow you to select the investment term. As a short-term investment, corporate FDs offer a tenure from one to five years. This allows you to choose a suitable tenure to meet your financial goals.
Most corporate fixed deposits provide higher corporate FD rates for senior citizens, just like bank fixed deposits. This is helpful for senior citizens who are dependent on the income from their fixed deposits.
Corporate FDs are similar to bank FDs in terms of basic features. But a few significant advantages of corporate FDs over bank FDs might make them a better choice for short-term investors. Let’s check them out.
The most important advantage of investing in corporate FDs is the higher corporate FD rates than interest on bank FDs.
A critical benefit of corporate fixed deposits is that most offer cumulative and non-cumulative interest-based payouts. The cumulative interest payout works on a compounding method and reinvests your earned interest. Ultimately, this results in higher payouts due to the power of compounding.
Unlike bank FDs, where the penalty period is as high as maturity, company fixed deposits typically have a penalty period of as low as three months; this is the minimum penalty period as per the Reserve Bank of India (RBI) guidelines.
Unlike bank FDs, which can have longer terms in years, corporate FDs have a maximum tenure of only five years. This makes them an excellent option for short-term investment.
Reputed credit ratings agencies like CRISIL, CARE, and ICRA provide safety ratings to all the corporate FDs and the issuing NBFCs. This gives investors assurance about the stability and credibility of corporate FDs.
Corporate FDs are unsecured instruments; if the NBFC defaults, investors might lose their invested money. The RBI and the Ministry of Corporate Affairs have laid down strict regulations and guidelines for NBFCs to safeguard the investors' money. Only NBFCs that fulfil the requirements can accept money from the investors as corporate fixed deposits.
To minimise corporate FD risk, NBFCs have to adhere to specific requirements. A few of them are as follows:
1. They must get a legitimate license to accept deposits from the public.
2. They must be managing a minimum of Rs.5,000 crore of financial assets.
3. The total deposit an NBFC can collect should be up to a permitted limit.
4. The maximum company fixed deposit rates cannot exceed RBI's permitted limit.
5. The tenure of FDs can be a maximum of five years.
6. NBFCs cannot offer any extra benefits to the depositor.
7. All the information related to the corporate FD is to be disclosed to the RBI.
8. NBFCs have to maintain a minimum credit rating for collecting fixed deposits.
These regulations and guidelines ensure that investors' money is safe when they invest in corporate FDs.
When you want to invest in a corporate fixed deposit, the high corporate FD rates should never be the only criteria to look for. You must consider the following factors:
Check the company's profitability and all the vital information available through their annual reports and data in public forums. This information gives you an accurate idea of the company's financial health.
You must check the NBFC’s repayment history of fixed deposit and interest payments. Check for a history of default.
Always check the credit rating of the NBFC through rating agencies. These give you insight into the company stability, corporate FD risk factors, and creditworthiness of the NBFC.
Like bank FDs, corporate fixed deposits also attract income tax if you fall into the tax bracket. You must pay the tax on the interest earned through the corporate FDs. TDS (Tax deducted at source) is deducted on interest greater than Rs. 5,000 in a financial year.
As you can see, corporate fixed deposit rates are better than bank FD rates, but they come with their associated risks. Considering all the factors, you can deposit your money in corporate FDs for better interest. On the other hand, bank FDs are an excellent choice for a long-term investment with secured and fixed interest rates. You can choose your option based on tenure, profitability, tax benefits, premature withdrawal, and risk appetite requirements.
Visit the Moneyfy website or download the Moneyfy app to pick top-performing bank FDs and corporate fixed deposits.
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24 October 2024
6 mins read
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