If you are looking at a solid investment portfolio, ensure that it has both debt instruments and equity component to ensure a risk-reward balance. Debt instruments include bonds, debentures, certificates of deposits, debt funds and fixed deposits among others. Debt instruments are considered stable and balance out your equity portfolio.
One of the debt instrument options is a corporate FD or a corporate fixed deposit. A fixed deposit involves investing a lump sum amount and receiving interest at periodic intervals till the FD reaches maturity. Much like bank FDs, companies also offer fixed deposits in order to raise funds for operations. Corporates, NBFCs and financial institutions all offer company/corporate deposits.
How do corporate deposits or company FDs work?
Corporate deposits or corporate FDs are term deposits that are held over a specific or fixed timeframe and come with a fixed interest rate. This does not mean that all corporates can offer fixed deposits. Corporate FDs are governed under the Sec 58A of The Companies Act, 1956. There are RBI guidelines involved in permitting companies to launch fixed deposits. For a company, raising funds through the company FD route is a convenient option because it is an unsecured loan.
Why should you invest in corporate FD?
Fixed deposits offer guaranteed returns as they are not linked to the markets. This is why they are sought after by those looking for stability and fixed income. Similarly corporate fixed deposits also offer guaranteed returns. If a company offers a certain rate of interest, it is offered irrespective of any fluctuations in the markets or interest rates.
Corporate FD interest rates are higher when compared to a bank fixed deposit. If you are looking at a debt instrument but at the same time want higher corporate FD interest rates for greater returns, a corporate FD is your choice. The debt component of your portfolio may then see returns that are in line with your goals.
Like a bank fixed deposit, corporate FD rates of interest are higher for senior citizens, making it attractive for this section looking for a combination of stability and an attractive periodic payout.
Short-term investment option
The bank fixed deposit has a tenure that ranges from a few months and can extend for years. On the other hand, a corporate FD is a short-term option with a short tenure of not more than five years.
Corporate FDs are also given ratings by reputed agencies like CARE, CRISIL or ICRA that track the company’s record and examine whether repayments and interest rates are offered on time and are revealed to potential investors. Companies are given ratings such as AAA, AA and BBB, among others. The highest rating is AAA and is assigned by agencies after looking at the company’s track record.
Choosing a nominee
You are permitted to choose a nominee when you opt for a company fixed deposit. This is an advantage because in the case of the unfortunate absence of the investor, the nominee can claim the returns when the corporate FD matures.
How to apply for a corporate FD?
You can look up corporate fixed deposit schemes online via digital platforms that offer investment options and apply in the same manner in which you would apply for a bank’s FD. You can avail of the application form either online or offline and provide your details.
Things to keep in mind while investing in a corporate FD:
As mentioned before corporate FD interest rates are higher than interest rates offered by bank FDs but as they are not secured, they can pose some amount of risk for the low-risk or conservative investor. Need a regular income? Corporate deposits are a good option in such a scenario.
Compare and then choose:
Corporate FD rates of interest may vary from one corporate entity to another, so do a comparison of different company fixed deposits before you pick one. Also look at tenures and the ratings the company has been given. A solid comparison is important.
Do your homework:
Apart from shortlisting corporate deposits with good ratings, also do your own homework about companies. Check their track record for any profit-making or loss history. If the loss is a one-off or an exceptional case, you can still make a deposit if the overall track record is positive. Also check the company’s reputation — have dividend payments been regular in the past? whether the company has all information and credentials upfront? Is the company new or has a long footprint? Check for the promoters and balance sheets. In general, get a good understanding of the company you would be making a deposit with.
If you wish to make a premature withdrawal in a bank FD within the first three months, you would have to pay a penalty. Many banks may even extend that period to six months. For a corporate FD too, there is a penalty or a cut in the guaranteed returns if you wish to withdraw in a certain timeframe. This could be within six months or even longer, depending on the company.
The TDS factor:
Tax deductible at source (TDS) comes into play for corporate deposits if your income through interest exceeds Rs 5,000. For fixed deposit interest income, TDS is applicable if the income is over Rs 10,000.
You could invest in corporate fixed deposits if you wish to add greater returns to the debt component of your portfolio. Having a corporate FD is a good idea to diversify your investments while maintaining the risk-reward balance. Corporate FD rates of interest are higher than bank FD rates. Also, corporate fixed deposits are given ratings by reputed agencies to help you compare interest rates, tenures, your own investment objectives and the credentials of the company before picking a corporate fixed deposit.