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Fixed deposits have been India’s oldest and most loved investment for a long time. They have served as a popular choice for anything from vacation funds to retirement savings. FDs have also been a popular option for investors who avoid risk and prefer predetermined returns and stability.
You don’t have to be a high-risk investor to make decent returns from your investment, like the players in equity, nor go low on returns in search of high-safety investments, like the FD players. Just like the feature of getting predetermined returns in bank FD, get higher than normal at the slightest risk depending on the creditworthiness of the corporates.
Banks remain the favored option for FD investments due to people’s trust in them. Similar to banks, a large number of corporations and non-financial banking companies (NBFCs) offer corporate fixed deposits for a predetermined period of time at a predetermined interest rate. They provide the flexibility to choose tenure and the security of returns, much like banks. But the question is, “Is corporate fixed deposit safe?”
Key Takeaways
- Corporate FDs are attractive for their higher returns, which work similarly to bank FDs but yield higher.
- The safety of the corporate FD relies on the credit ratings given to the corporations based on the financial assessments done by agencies such as ICRA, CARE, and CRISIL.
- The flexibility in the tenure of the instrument makes it more approachable which usually ranges from 1 to 5 years.
- A premature withdrawal option is allowed in Corporate FDs but with penalties.
- Has higher liquidity compared to the alternative instruments in the market but less compared to the bank FDs.
- Up to 75% of the invested amount value in Corporate FDs, investors can avail a loan using it.
- Tax on the interest is applicable, along with a TDS of about 10% only if the earned interest exceeds more than Rs 5,000 in a year.
- Corporate fixed deposits are unsecured investments that carry slightly higher risk in comparison with bank FDs. The risk is dependent on the financial health of the issuing company.
Understanding Corporate Fixed Deposits
Several corporations and NBFCs have the opportunity to take deposits at a specified interest rate for a set period of time. Such deposits are known as corporate fixed deposits.
Corporations take funds from people for a set period of time under the guise of fixed deposits. The funds are then used for that specific time period, with the corporation providing a set rate of interest to every person whose money is being used. Since corporate fixed deposits are unsecured loans, it might be easy for a business to raise funds for operations related to finance and manufacturing. Furthermore, they are for a longer time period.
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Features of Corporate Fixed Deposits
The features of corporate fixed deposits include:
Credit Ratings
Credible rating agencies such as ICRA, CRISIL, and CARE assign Corporate FDs a credit rating. The rating helps those making deposits assess the creditworthiness of the corporations and the risk of default in the principal and interest payments.
Tenure
A corporate fixed deposit generally has a term of one to five years. You are free to pick any suitable period from this range.
Interest Rate
When you invest in corporate fixed deposits, you will likely receive a higher interest rate over time. Usually, they offer interest-based payouts that are both cumulative and non-cumulative. Interest is reinvested to increase dividends and compound returns through cumulative interest payouts.
Premature Withdrawal
Depositors might request an early withdrawal from the enterprises. Many HFCs and NBFCs levy penalty charges on public deposits. The amount of the penalty may differ between corporations. Some public deposits, however, come with a three-month lock-in period or defined term during which the funds cannot be withdrawn.
High Liquidity
Corporate FDs have slightly greater liquidity because it is easier to withdraw money prematurely. However, compared to other options without a lock-in period, their liquidity can still be lower.
Loan
You can get loans from corporate FDs worth up to 75% of the entire FD value. In certain circumstances, the FDs may also be taken as security for loans.
Is Corporate Fixed Deposit Safe Investment?
Before investing even a small amount of money, we encounter certain questions: Is it a safe investment? Will it be profitable for us? What will the effect of the market be on our investment? It is worth mentioning that corporate fixed deposits have a no-collateral system; they are a lower-risk investment comparatively and offer plenty of advantages.
Short-term Investments
Short-term investments are a significant benefit of investing in corporate FDs. Additionally, the Benefits of Investing in Corporate Fixed Deposits include higher interest rates, flexible tenures, and the potential for regular income, making them an appealing option for conservative investors. Bank FDs are available for anywhere from a few months to a couple of years, while corporate FDs are limited to five years, making them an effective choice for investors looking for better returns in a brief amount of time.
Contractual Obligation
Whenever an FD is granted, the organisation enters into a contractual agreement that defines the details of the investment. These specifications generally cover the amount of money invested, the term of the FD, the interest rate, and the repayment structures.
Contractual obligations benefit both the organisation and you. The organisation gets access to funds at a set interest rate that it may use for growth, operational needs, and investment projects, among other uses. The contract’s conditions also ensure an agreed-upon return while protecting your money using the legal agreement.
Bank’s Creditworthiness
Since corporate FDs are usually rated by credit rating agencies, they are seen as a safe investment option. In particular, when compared with stocks or other capital investments, this makes them a relatively low-risk investment choice.
Better Returns
Corporate FDs are a popular investment choice for investors trying to increase their profits. These FDs offer higher returns. Corporate FDs offer callable and non-callable FD interest, and they normally have set interest rates.
The Risk Involved in Corporate FDs
Like any investment there is a risk associated with it:
- Corporate FDs are unsecured deposits therefore they can have the risk of default, like in the event that the corporations fail to meet their obligations. Before investing check the creditworthiness of the company.
- The liquidity in corporate FDs isn’t that in Bank FDs, you might find some limited options allowing early withdrawal and in some cases, there might be penalties. You might want to learn about the early withdrawal options in case you think there is a requirement before investing.
- When the interest rate rises, the existing CFDs that you hold might seem less competitive as the interest rate of other CFDs can increase or decrease subject to changes in the interest rates in the market.
- Market risk is a concern that can impact the financial performance of the corporations which may impact their ability to stand by their obligations.
You can mitigate risks by thoroughly researching companies and diversifying your portfolio. Investing in Corporate Fixed Deposits allows you to achieve a balance between risk and reward, particularly when choosing companies with solid financial standing and high credit ratings.
Bottom Line
Corporate fixed deposits can be a useful upgrade to your investment account if you have a low to mild risk threshold. Similar to bank fixed deposits, corporate fixed deposits remain unaffected by changes in interest rates or the market. Every investment has some level of risk. Corporate FDs carry their own certain risks. However, the profits they offer are also significant.
A corporate FD plan is an excellent choice if you have a goal that you want to reach in one to five years. However, remember to check the credit standing of the corporation before you invest your hard-earned funds. GoldenPi– your one-stop solution helps you learn about the different corporate fixed deposits offered and their features so that you can easily invest your money in the best corporation.
FAQs about Corporate Fixed Deposits
1. Are Corporate Fixed Deposits a safe investment choice?
When highly rated companies issue corporate FDs, for example, anything above an A rating is a better investment choice. Compared to bank FDs, they may be slightly risky as they come with higher returns but an issuer with a higher credit rating offsets most of the risk. Hence, before making an investment decision, choose corporate FDs that have investment grade credit ratings and those that have financial stability.
2. What is the minimum period of corporate FD?
Corporate FDs, like Bank FDs, provide a variable tenure option that allows you to keep your investment for a period of 12 to 60 months. If you want to save for a specific reason, you may invest for a year.
4. Are the returns on Corporate FDs taxable? If yes, what is the TDS treatment?
Certainly, the interest earned from corporate FD is subject to taxation based on an individual’s marginal tax slab rate. Additionally, a 10% TDS is deducted from the interest payable if the total interest earned in the financial year is greater than or equal to Rs. 5,000/-. To be exempted from TDS, resident individuals can submit the relevant form 15G or 15H (as applicable). It’s important to note that this declaration must be submitted annually until maturity.
5. Why is corporate FD better than bank FD?
Compared to bank FDs, corporate FDs have higher interest rates. Considering the necessity of corporate finance, companies typically provide higher interest rates. Interest rates on corporate FDs are generally 0.75 to 1.5% higher than those on bank FDs. A number of AAA-rated corporate fixed deposits have interest rates higher than 8%.
6. Which corporate FD is best?
Corporates have been rated or classified in the following categories: AAA, AA, and BB. These rating levels are based on the corporations’ past financial records. The best corporate fixed deposits can be determined using these ratings. AAA is the most highly regarded corporation rating.
7. Which companies can offer corporate fixed deposits?
The following are the requirements for eligibility for Corporate/Company FDs:
- Companies registered under the Companies Act, 1956
- Any company, whether private or public limited
- Any non-partnership corporation that is not an unincorporated business
- Any organisation registered under the 1932 Partnership Act
- Limited liability partnership (LLP)
- Any cooperative organisation that has been authorized by the Cooperative Societies Act of 2002
8. How to invest in Corporate Fixed Deposit?
Through GoldenPi, you can quickly and conveniently invest in the best corporate FDs. Here’s an easy three-step investment process.
Step 1: Register on GoldenPi and finish the KYC process.
Step 2: Choose your corporate FD.
Step 3: Make the investment and reap the benefits.
