What are corporate fixed deposits?

Corporate fixed deposits (FDs), also known as company fixed deposits, are a type of term deposit offered by non-banking financial companies (NBFCs), housing finance companies, and corporates to raise debt capital. They are similar to traditional bank fixed deposits but offer relatively higher interest rates. 

What is a corporate fixed deposit?
 

A corporate FD is an investment product offered by non-banking finance companies and firms to raise funds from the public. In a corporate FD, the investor invests a lumpsum amount with the company for a predefined tenure, ranging from a few months to a fixed number of years . The company offers a fixed rate of interest on the investment for the entire tenure. The principal and interest earned are repaid at the time of maturity.

Key features of corporate fixed deposits
 

●  Corporate deposits are issued by non-banking finance companies, firms, and corporates. They are not issued by commercial banks.

●  Mature in a predefined period ranging from a few months to a fixed number of years.

●  Offer guaranteed returns in the form of fixed interest rates.

●  Corporate FD rates are higher than bank fixed deposits.

●  Interest is payable monthly, quarterly, annually, or at maturity.

●  Principal and interest repaid at the time of maturity.

●  Available in cumulative and non-cumulative options.

●  Minimum investment amount varies across issuers.

●  Corporate FDs can be pledged as collateral to get loans.

● Premature withdrawals are allowed at a penalty in some cases.

●  Interest earned is fully taxable as per the investor's tax slab.

Who can invest in corporate FDs?
 

●  Individuals - Resident Indians as well as NRIs can invest in corporate fixed deposits.

●  HUFs - Hindu Undivided Families are also permitted to invest in these instruments.

●  Partnership firms, companies, trusts, and societies can also purchase company FDs.

●  Minors can invest in corporate FDs via guardians.

●  Financial institutions, NBFCs and banks can invest their surplus funds in corporate FDs.

Thus, corporate fixed deposits are suitable for a wide range of individual and institutional investors looking for relatively higher and stable returns.

Benefits of investing in corporate fixed deposits

Let's look at some of the major benefits of corporate fixed deposits.

● Higher interest rates - The interest rates offered on corporate FDs are usually about 1-3% higher than bank FDs. This allows investors to earn greater returns on savings.

● Flexible tenures - Corporate deposits offer tenure options ranging from a few months to a fixed number of years. [JV1] Investors can pick a suitable tenure as per their requirements.

● Regular income - Corporate FDs offer periodic payouts of interest - monthly, quarterly, half-yearly, or annually. This provides investors with a regular income stream.

● Capital safety - Corporate deposits are relatively safe if invested in high-rated companies. They offer guaranteed returns of principal and interest.

●  Liquidity - Investors can take premature withdrawals, subject to certain rules and conditions, incurring a penalty.[JV2]  Also, investors can take loans against their FDs.

●  Simplicity and transparency - The process of investing in corporate FDs is quite straightforward. The terms and returns are clearly specified.

How to evaluate and choose a corporate FD?
 

Here is a step-by-step process to evaluate and choose a suitable corporate fixed deposit.

●  Check company reputation - The issuer company must have a strong reputation, financial stability, sound creditworthiness, and be registered with RBI.

● Research credit ratings - Only invest in companies rated highly by CRISIL, ICRA, and CARE with ratings like AAA or equivalent.

●  Compare interest rates - Compare FD rates across issuers and tenures to find the highest rate based on your investment horizon.

●  Understand all terms - Read the terms carefully to know the lock-in rules, interest payout frequency, premature withdrawal rules, etc.

●  Check claim settlement history - Review the claim settlement ratio and track record in repaying deposits on time.

● Limit exposure - Do not invest more than 15-20% of your portfolio in a single company's FDs.

By evaluating these parameters, you can zero in on a safe and optimal corporate FD investment.

Conclusion

Corporate fixed deposits offer the benefit of higher interest rates as compared to bank FD[JV1] s, making them attractive fixed income instruments. However, the risks are also higher due to a lack of insurance coverage. By considering factors like company reputation, financials, credit ratings and claim history, investors can make informed investment decisions. Investing a small portion of one's portfolio in highly rated corporate FDs can provide good returns. However, investments must be spread across companies and tenures to minimise risk. Thus, Corporate FDs present a rewarding investment option for certain types of investors willing to take on additional risk for higher returns.