Bank fixed deposits are the safest and guaranteed investment option investors always look for. But many investors are not aware about the corporate FDs, which are also as good as bank FDs and come with higher interest rates. Let’s understand this better:
What are Corporate FDs?
Corporate FDs are similar to Bank FDs except for the fact that it offers higher interest rate and issued by a corporate. Companies offer this deposit in order to raise money which is mainly used for varied purposes like meeting working capital requirement, repaying existing loans taken at a higher interest rates or expanding the business operations.
Comparison between Bank FDs and Corporate FDs
a) Interest rate: Rate of interest plays the main difference between Bank FD and a Corporate FD. Whereas interest rate offered by banks ranges from 6 to 9 per cent as compared to the companies which offers around 9 to 13 per cent rate of interest.
b) Security: Bank deposits are insured up to Rs. 1 lakh by RBI’s DICGC facility i.e. Deposit Insurance and Credit Guarantee Corporation, means your bank deposit up to Rs.1 lakh is insured by DICGC while the same is not applicable for corporate FDs.
c) Credit rating: Credit ratings are not applicable for bank FDs; but applicable for companies though not obligatory, but many companies get their deposits rated.
d) Withdrawals & liquidity: Both are liquid investments and while bank FDs can be withdrawn in a much easier way and with immediate effect; Corporate FDs may take couple of weeks to release the funds.
When and why should you invest in Corporate FDs?
If you have surplus amount which you can keep aside for couple of years and your existing portfolio is already diversified and consists of bank FDs; then you should definitely shift and invest some amount in Corporate FDs. Since the rate of interest offered is higher than the Bank FDs, it is indeed a much attractive and guaranteed investment option you should invest in.
But, higher rate of interest also comes with the higher amount of risk. To avoid that risk you should always invest in a company with a proven track record; check its financials and the reason of collecting money and its end use. If the money raised by Corporate FD is going to be invested for company’s
expansion and future plans then it would be prudent to invest in it. You should always select a company with a high rating.
There are many good companies available across different sectors like manufacturing, finance, infrastructure etc. which offers Corporate FD. You can invest in any company after a due diligence.
So the next time you visit a bank for opening a FD, do give a thought about corporate FD as well.
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