Fixed deposits (FDs) have been a popular investment instrument in India for earning fixed and guaranteed returns on savings. However, following the flat-lining interest rates on FDs and recent rate cuts by the Reserve Bank of India (RBI), many investors are now looking for a different investment option.
If you are looking for stable interest rates and are willing to bear moderate risk on your investment, then you can find a good alternative in Corporate Fixed Deposits (CFD). Here’s all you need to know about how corporate FDs function and the advantages and risks involved.
What are Corporate FDs?
Corporate FDs, a type of fixed deposit, are issued by corporates and non-banking financial companies (NBFC). Here, these companies collect fixed deposits at a pre-defined rate of interest for specific tenures. Similar to bank FDs, CFDs provide you with guaranteed returns and flexibility to pick your tenure. Typically, these fixed deposits are rated for their credibility by rating agencies such as CRISIL, ICRA, CARE, and more.
Salient features of corporate FDs
No Volatility in Returns
A significant advantage of investing in corporate FDs is that you receive returns that are not volatile at all as in the case of equity. Say, you invest Rs. 1 lakh in a corporate FD and the concerned institution promises an annual interest rate of 7%. Irrespective of whether the market soars or declines over the tenure of the CFD, you receive Rs. 1.07 lakhs on maturity.
Since you are privy to the exact amount you will receive on maturity, at the time of investment, you can navigate your financial decisions smartly.
Higher interest rates for senior citizens
Senior citizens typically enjoy higher interest rates compared on CFD schemes. Furthermore, various corporate FDs allow you to choose your interest payment schedule – monthly, quarterly, half-yearly, or yearly intervals. If you are receiving a pension, these FDs can supplement your monthly income.
Just like bank FDs, the interest on your corporate FD is taxable depending on your slab rate. Starting from the financial year (FY) 2020-21, if your interest income exceeds Rs. 5,000, you have to pay a Tax Deduction at Source (TDS) amount at 10% on your corporate FD.
Some investors are sceptical of investing in CFDs due to the misconception that these instruments are riskier, and they may lose money if the company defaults or faces bankruptcy. However, all financial institutions collecting deposits adhere strictly to regulations from the Ministry of Corporate Affairs (MCA) and the RBI. Hence only a handful of NBFCs are eligible for accepting corporate FDs, and these measures ensure that the risk for investors remains negligible.
Before investing in a corporate FD, you must check the credit rating of the company to understand its ability to fulfil financial obligations. In India, credit rating agencies like ICRA and CRISIL analyse and assess the company’s performance and history of adhering to MCA and RBI regulations. Depending on the evaluation, companies are assigned ratings, from BBB, AA, to AAA. At least a rating of BBB is required for a company to collect deposits from investors.
It is advisable to invest in AAA-rated companies.
Pre-closure of deposits
Typically corporate FDs don’t allow pre-closure within six months from the date of investment. If you choose to withdraw the investment before maturity, a penalty may be levied.
The bottom line
With flexible tenures, guaranteed returns, and investment protection of a fixed-income instrument, corporate FDs are excellent tools for growing your money.
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