What are corporate FDs? Are they better than traditional FDs?
What's the story
Corporate fixed deposits, provided by non-banking financial companies (NBFCs) and corporate entities, offer higher interest rates than traditional bank fixed deposits. They have emerged as a preferred option for Indian savers seeking higher returns on their investments without the need to venture into high-risk avenues. This article sheds light on the advantages and factors to consider when investing in corporate fixed deposits.
Attractive returns
Higher interest rates
Corporate fixed deposits typically provide interest rates one percent to three percent higher compared to bank fixed deposits. For example, if a bank offers six percent, a corporate FD could offer seven percent to nine percent. This difference can greatly improve total returns over time, making corporate FDs an attractive option for savers seeking higher returns on their investments.
Flexibility
Shorter lock-in periods
A second benefit of corporate fixed deposits is their greater flexibility regarding investment duration. Unlike banks, which typically mandate a minimum lock-in period of six months to a year, certain corporate FDs permit investors to commence with a tenure as short as three months. Such flexibility allows savers to strategize their investments more effectively and retrieve their funds reasonably promptly in case of necessity.
Financial support
Loan against deposit
Investors can obtain loans against their corporate fixed deposit certificates at attractive interest rates, typically up to 75% of the deposit value. This facility offers financial assistance in times of emergencies without the need to prematurely break the deposit, which could result in penalties or loss of potential interest income.
Convenience
Auto-renewal options
Most corporate FD schemes offer an auto-renewal facility. This means that your investment will be automatically renewed for the same tenure at the prevailing interest rate once it matures. This eliminates the need for you to go through the process of reinvesting your funds. Your money will keep earning interest without any break.
Risk assessment
Credit rating consideration
Before investing in a corporate FD, always check its credit rating. These ratings are assigned by agencies like CRISIL or ICRA and serve as indicators of risk. A high rating (e.g., AAA) means lower risk and indicates that the company is more likely to pay back its debts along with promised interests. Despite potentially higher returns, savers should avoid chasing lower-rated FDs due to the increased risk.