The interest rates of company fixed deposits (FD) or corporate FDs have witnessed a spike compared to bank deposits.
Like banks, the Reserve Bank of India (RBI) permits selective corporates and non-banking financial companies (NBFCs) to accept deposits for a fixed interest rate and tenure. The deposits in this case are called the company or corporate FDs.
The high market volatility and uncertain returns call for investing in corporate FDs, which can help an investor with fixed, predictable returns. An investor can look forward to earning regular income with a pay-out option or accumulating capital through a cumulative option.
However, before opening company FDs, investors could compare the FD interest rates from small finance banks and private sector banks.
The interest rates of company FDs are higher, considering there is an additional risk. Perhaps, the largest credit risk could be company may not be able to pay back the depositor in terms of interest or the principal.
An investor can check out the credit rating as one of the parameters to gauge the possibility of default. For instance, AAA-rated companies as higher ratings translate into higher income certainty and capital protection. Although a highly rated company FD only reflects relative safety, it cannot assure it. A time-tested method is to gather insight into the company’s management and business model initial to investing.
Those with a higher risk appetite and aiming to gain higher returns from FDs but at higher income certainty than bonds and debt funds can opt for company FDs. The key difference is that in a bank deposit, the principal and the interest of Rs 5 lakh are insured under Deposit Insurance and Credit Guarantee Corporation, this is not the case with company FDs.
A shorter tenure of, maybe for 1-2 years, remains ideal. Investors can look at opting for longer tenures only in case of any assurance that the broader market interest rates have peaked. Consider laddering deposits into multiple fixed deposit accounts of different terms to gain high returns with liquidity at regular intervals. Company FDs usually have penal rates for premature withdrawals similar to bank deposits. The returns are taxed as per the tax slab of the investors in the case of corporate FDs.
Rajiv is an independent editorial consultant for the last decade. Prior to this, he worked as a full-time journalist associated with various prominent print media houses. In his spare time, he loves to paint on canvas.