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.
Important 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.
Post-tax returns
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.
Minimum risk
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.
Credit rating
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.
Benefits of Investing in Company Fixed Deposits
Company fixed deposits offer multiple advantages, including-
- Higher returns- Company fixed deposits typically offer better interest rates than bank FDs, allowing investors to grow their savings more efficiently.
- Low investment requirement- With a minimum investment of just INR 5,000, these deposits are accessible to beginners and small investors.
- Flexible options- Company FDs provide flexibility in terms of tenure and interest payout options. You can select a tenure from 1 to 5 years and choose payout frequencies such as monthly, quarterly, half-yearly, yearly, or cumulative, based on your financial goals.
- Liquidity- Unlike bank FDs with longer lock-in periods, company FDs generally have better liquidity, allowing quicker access to funds when needed.
- Premature withdrawals- If necessary, you can opt for premature withdrawal, which allows you to close the deposit before maturity while maintaining financial security in emergencies.
- Safety assurance- Credit rating agencies assess company fixed deposits, ensuring transparency and helping you evaluate the safety of your funds.
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.
If you are looking to fulfil your financial vision with smart investment and wealth management services, turn to Tata Capital Wealth. Leverage the experience of our investment product specialists and relationship managers, and nurture your wealth with ease. Connect today!
FAQs
Corporate fixed deposits are safe when issued by companies with strong credit ratings. However, unlike bank FDs, they are not insured. It's essential to research the company's credibility before investing.
Corporate FDs can be withdrawn before maturity, but the company may charge a penalty for early withdrawal. Check the specific terms of the FD to understand the applicable conditions.
Corporate FDs provide fixed returns with lower risk, making them suitable for conservative investors. On the other hand, corporate bond funds offer diversification but come with market-linked risks and fluctuating returns.
Interest earned on corporate FDs is taxable. If the total interest exceeds Rs. 5,000 in a financial year, the issuing company deducts 10% Tax Deducted at Source (TDS) before crediting the amount.
To withdraw a corporate FD early, submit a request to the issuing company. The company calculates any penalties for premature withdrawal and refunds the remaining amount to the account holder.
17 February 2025
4 mins read
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