Corporate FDs: Consider these points before investing

Fixed deposit (FD) is one of the most secure investment avenues that guarantees predictable returns. But over the past few years banks have reduced their FD interest rates. On the other hand, company or corporate fixed deposits offer higher returns in comparison to bank fixed deposits across different tenures. Corporate FDs are term deposits that are offered by corporates and non-banking financial companies (NBFCs) that are held for a fixed period of time at a fixed rate of interest. It closely resembles bank FDs. Corporate FDs offer 0.75 to 2% higher returns than regular fixed deposits. That’s why they have been attracting investor attention. But an individual should consider some important points in mind before investing in them.

Here are they:

Yield calculation

Many corporations try to attract customers by advertising high yields rather than interest rates. But some corporations calculate FD yields differently. As a result, it looks higher than what they actually are. So, before investment one should consider interest rates carefully.

Risk factors

Company fixed deposits (FDs) carry higher risk than bank fixed deposits (FDs). Bank FDs up to 5 lakh are secured with insurance cover offered by Deposit Insurance and Credit Guarantee Corporation (DICGC).

But there is no such insurance cover for company FDs. In that case everything depends on the overall health of these companies. So, it is very important to check the rating and the financial health of the company before investing.

Safety

Various credit-rating firms such as CRISIL, ICRA, and CARE, assess the credit quality of these non-banking financial companies (NBFCs). Naturally, a high-rated company deposit with AAA or similar grade is always highly preferable.

Tenure and payment

Generally, NBFCs offer FDs for the tenure of 12 to 60 months. There are two types of interest payment options on company FDs – cumulative and con-cumulative.

For con-cumulative deposits interest may be payable at monthly, quarterly, half-yearly or annually.

Lock-in rules

In general, corporate fixed deposits come with slightly more stiff premature withdrawal conditions than banks. According to experts, in maximum cases investors cannot withdraw the deposit within three months from the date of deposit.