What Are CFDs? How Are They Rated? Risk Vs Return Evaluation Of CFDs

Fixed deposits have always been a top investment option for conservative investors seeking guaranteed returns. But did you know that you can fetch relatively better interest rates with corporate fixed deposits? That’s right! Apart from banks, NBFCs and other companies also offer excellent FD schemes that promise you decent returns at maximum flexibility.

However, corporate FDs carry a slightly higher risk than regular FDs. But, you can still reap the benefits of corporate FDs and avoid risks if you conduct proper research before investing.

So, how to choose Corporate FDs for your portfolio? To help investors make an informed decision, agencies like CRISIL have devised a rating system for corporate fixed deposits.

In this article, we will explain what corporate fixed deposits are, how they are rated, and how to evaluate your portfolio with respect to risks and returns.

What are corporate fixed deposits?

A corporate fixed deposit (also called corporate FD or CFD) is a term deposit offered by companies and NBFCs for a specific tenure at a fixed interest rate. Similar to bank FDs, corporate FDs also provide assured returns at maturity.

You can invest your funds in a wide range of company FDs depending on the rate of interest, tenure, and institution as per your financial needs.

How CRISIL rates corporate fixed deposits?

CRISIL is a leading global analytics company. It is India’s foremost provider of ratings, data, research, analytics, and solutions. CRISIL also rates FD programs of corporates on a 20-point rating scale (CRISIL AAA to CRISIL D). Note that CRISIL also appends ‘+’ (plus) or ‘-’ (minus) modifiers for ratings from ‘CCR AA’ to ‘CCR C’ to reflect comparative strength within that category.

Here is a list of ratings given by CRISIL, from highest to lowest.

• CCR AAA ("CCR Triple A")
• CCR AA ("CCR Double A")
• CCR A
• CCR BBB
• CCR BB
• CCR B
• CCR C
• CCR D
• CCR SD

If the rating of the CFD is ‘CCR AAA,’ this means that the NBFC has duly honoured its debt obligations in the past.

Ratings Below AAA is relatively lower, however corporate FDs with lower rating provide higher interest to compensate to Risk. Diversifying the portfolio into various risk categories will help you optimize your portrfolio as per your risk tolerance.

Look for Corporate FDs with rating of AA+ & above to ensure you yield  higher interest benefits with low risk. Higher rated corporate fixed depositsare known to have a stable financial history, making them a safer option. Besides, they offer higher rates than regular FD investments.

Risk vs. returns evaluation of CFDs

Are AAA rated CFDsthe same as regular bank deposits? Not quite. One key difference is that while bank deposist are insured up to a sum of Rs. 5 lakh, corporate FDs are not.

But this shouldn’t stop you from investing in this highly lucrative instrument. Consider the risk factors by performing a thorough background check of the company issuing the fixed deposit. Let us explore how to make an informed investment decision in the  next section.

Which company’s fixed deposit should you invest in?

Before investing your hard-earned money in a corporate FD, keep the following parameters in mind:

• Credit Rating: Look for higher-rated corporate FDs based on the NBFC’s credit rating. This credit rating is given by CRISIL and indicates the underlying risk. AAA-rated corporate FDs are the lowest risk FDs.
• Background of the company: Do a thorough background check of the credit company by evaluating its business viability. You can refer to the following:
• Financial Statements
• Management discussion and analysis (MD and A)
• Repayment History: An organization’s repayment history helps to determine its credit score, credibility, and stability. If the company has a history of default, it is a risky investment.
• Risk profile evaluation: Make sure that the company you pick is financially healthy. This step helps you rule out any default risk during the fixed deposit period.

Before you invest

Here are some things you should keep in mind before investing in CFDs:

• Interest rates: Apart from these parameters pay special attention to the interest rate offered. Higher interest ratesare what make a corporate FD attractive. But it is crucial that you research and compare FD interest rates before opting for one. However, don’t just blindly invest in the FD that offers the highest interest rate. Check for the credit rating, assess the background, and evaluate the risk profile.
• Your investment objective: Be clear about your investment objective. What are your goals? Do you want the safety of your capital? Do you want to build a corpus with high returns? What is your ideal period of investing?
• Your portfolio: Since CFDs are debt instruments, they are best suited for short to medium-term investments. So, evaluate your portfolio and your risk profile. Experts suggest that you shouldn’t rush to invest a large sum of your money in CFDs.
• Diversification: Investing in CFDs along with equity is a good way to diversify your portfolio. If you want, you can also invest in multiple corporate FDs. If your deposits are spread over a large number of companies engaged in different industries, you will be able to diversify your portfolio even further and minimize your risk. However, beware of spreading yourself too thin with over-diversification.

Start investing in Higher rated company FDs based on your risk profile

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