If you are interested in investing in fixed deposits, you can choose between corporate fixed deposits and bank fixed deposits. Fixed deposits as investment options are low-risk as they are not linked to the markets, and have for long been sought as an investment option by low-risk or conservative investors.
How does a fixed deposit work?
You invest a lump sum amount for a specific period of time and earn an interest rate on your investments. You can either get monthly payouts or your investment with earnings at the end of the fixed tenure, depending on the kind of fixed deposit you choose.
Corporate fixed deposits
- Corporate fixed deposits are offered by corporates or non banking financial companies (NBFCs). Corporate fixed deposits in India are governed by Section 58 A of the Companies Act. Many guidelines are put into place by the RBI as well, and not all companies offer or can offer corporate fixed deposits. They are unsecured and not depend on any collateral.
- Corporate FDs in India are usually short term, with maturity periods of five years and a minimum of one year.
- Corporate deposits offer assured yield like bank fixed deposits. The similarity is in the way both the FDs are structured but the attractive feature of corporate FDs is the higher corporate deposit rates, when compared to bank fixed deposits. The interest rate is even higher for senior citizens.
- You would need to look at ratings given by agencies such as ICRA or CRISIL among others; AAA ratings are indicative of highest safety.
Bank fixed deposits or bank FDs
Bank FDs are those offered by banks and financial institutions. These could be state or private banks. Some of their features include:
- The interest rates of bank FDs are lower than corporate deposit rates. Although bank FDs also offer a higher interest rate for senior citizens, they are still not as high as corporate fixed deposits in India.
- The tenures of bank fixed deposits are typically higher than corporate fixed deposits; bank FDs can have a tenure of up to 10 years.
- While bank fixed deposits come with a safety option in terms of an insurance on deposits, there is no such option for corporate fixed deposits in India. According to RBI rules, any deposit made with commercial or cooperative banks should be insured for up to Rs 5 lakh under Deposit Insurance and Credit Guarantee Corporation or DICGC. This means bank fixed deposits offer a high level of safety. On the other hand, corporate fixed deposits are not covered under DICGC.
Who should opt for company FDs?
- If you have a short-term investment goal and seek a potentially higher rate of yield than from a traditional bank fixed deposit, a corporate FD is for you. You could opt for a corporate FD when you are comparing deposit rates: corporate deposit rates are higher than bank FD interest rates.
- You are looking to diversify your investment portfolio and wish to add a debt instrument that also offers a relatively high interest rate.
- You have a short-term investment goal but you are not keen on mutual funds or stocks because of market exposure, making you a risk-averse investor. In this scenario, opting for one of the corporate fixed deposits in India may seem like a good option for your needs as they are not linked to market dynamics.
- You are looking at a steady and substantial income as periodic payouts; in this scenario you could opt for corporate fixed deposits in India that allow you to make quarterly or monthly payouts, depending on your cash flow requirements.
- You are willing to look at company credentials; how they have been performing in the recent past, the promoters backing them etc and assess if the company is credible before depositing a lump sum amount with them.
Who should opt for bank fixed deposits?
- You are a conservative risk-averse investor who doesn’t want to invest in market-linked options. Also, you may already have invested in some market-linked options and are looking at debt instruments that are secure and low-risk to balance your portfolio.
- You don’t have the time or resources to look into company fundamentals and research required to choose a company fixed deposit. If that is the case, choosing a bank fixed deposit may seem more convenient as you can choose an FD scheme from a credible bank.
- You may be a senior citizen and wish to seek a regular periodic payout of interest income; you can opt for a bank FD that offers regular payouts.
- On the other hand, you may be looking at a short-term investment goal and wish to reinvest your interest. This option too is available with bank FD schemes.
- Since the tenures range anywhere between seven days and 10 years, you could pick an investment tenure that suits you best.
Now that you know the broad differences between corporate fixed deposits and bank fixed deposits, the choice you make depends on these factors:
- Your goals:You would need to assess if your goals are short-term or long-term and pick one of the corporate fixed deposits in India or bank FDs, based on the goals. If you have a short-term goal like buying a car, look at corporate deposit rates carefully, compare them and then pick one. For long-term goals, you could opt for a credible bank or NBFC/corporate that offers fixed deposit schemes. Don’t forget to do your homework about the company if you are picking a corporate FD.
- Your risk profile: The investment option you choose depends on your risk profile. Whether it is a bank FD or a corporate fixed deposit, you would need to assess your profile — your income, commitments and cash flow requirements before taking a call.
- Your investment portfolio:Is your investment portfolio well-balanced and adequately diversified? Take a look at your portfolio and pick a corporate fixed deposit or bank FD, based on whether you need a debt instrument that also offers potentially high returns (corporate FD) or a debt instrument that is steady, offers relatively lower returns than a corporate FD but more secure? The answer lies in your own investment needs.
Bank fixed deposits offer lower interest rates than corporate fixed deposits in India. When you are investing in corporate fixed deposits, check company credentials and pick one that is best aligned with your needs.