Is it Safe to Invest in Corporate Fixed Deposits? Risks and Benefits Explained

Is it Safe to Invest in Corporate Fixed Deposits? Risks and Benefits Explained

Fixed deposits are a very popular investment option among Indian households. This is because they offer assured returns and are not linked to markets. Generally, people invest in Fixed deposit schemes offered by Banks in India. But banks are not the only ones offering fixed deposits. Nowadays, even corporates are offering FDs known as Corporate Fixed Deposits. They offer higher interest rates as compared to bank FDs.

But with high interest comes high risk also. These FDs are not supported by any insurance like bank FDs are. Thus, it carries a lot of risks. In this article, we will understand Corporate Fixed Deposits and whether it is safe to invest in them or not.

What are Corporate Fixed Deposits?

Corporate Fixed Deposits are fixed deposits offered by corporates that include Companies, Financial Institutions, and NBFCs. They issue FDs to raise money. Just like banks, these companies also collect deposits from investors for a specific tenure at a fixed interest rate. These FDs too offer assured returns and flexibility to choose the tenure at your convenience.

Corporate FDs are preferred by some people because it offers higher interest rate as compared to bank FDs. But with these higher returns also comes high risk. As this FDs doesn’t guarantee the safety of your deposits. The tenure for these FDs ranges from 6 months to 5 years.

How Corporate Fixed Deposits Work?

When corporates require money, they plan to collect it from the general public by offering them Fixed deposits. This is a very easy way for corporates to raise money for their future plans. The money so collected through a fixed deposit is for a specific time period. Fixed interest is offered on these deposits.

Periodic interest is paid to investors on these fixed deposits till their maturity. At the time of maturity, the deposited amount is returned to the investors. The investors also have the option to reinvest the money in the same corporates. These corporate FDs can’t be issued by anyone. RBI has issued certain guidelines for the same which have been prescribed under Section 58(A) of the Companies Act (1956). As per which only certain companies are allowed to issue FDs.

Risk Involved in Corporate Fixed Deposits

Corporate Fixed Deposits are run under strict regulations laid out by RBI and the Ministry of Corporate Affairs. This clearly means that not all companies are allowed to issue corporate FDs. Companies are required to have certain ratings to be qualified to raise money through the issuance of Fixed deposits. The minimum credit ratings required by major rating agencies as prescribed by RBI are as under:

• CRISIL Rating, i.e. the Credit Rating Information Services of India Limited: FA – (FA Minus)
• International Credit Rating Agency (ICRA): MA – (MA Minus)
• CARE: CARE BBB (FD)

The ratings provided by credit rating agencies don’t assure the safety of your investment in corporate FDs. There are certain risks involved which are as follows:

1. Default Risk: Corporate FDs are not secured by insurance like bank FDs. There is neither guarantee of your money protection nor any assuredness of interest payments. If the company faces turmoil, then you may lose all your money invested.
2. Taxation Load: Interest in corporate FDs doesn’t enjoy exemption benefits like bank FDs. Interest on corporate FDs is added to taxable income and taxed as per the income tax slab. And those who earn a good amount of income and pay high taxes, the corporate FD is not so beneficial for them.
3. Withdrawal Penalty: The corporate FDs come with a lock-in period. If you withdraw them before that then you have to pay a penalty. Apart from that there is no facility for partial withdrawal. Premature withdrawal here means closing the FD.

Things to Consider while Investing in Corporate Fixed Deposits

Now you know that bank corporate FDs are not very safe. They carry some amount of risk. But you can reduce the risk if you consider the following factors while investing in Corporate FDs:

1. Company’s Track Record: Some investors while investing in corporate FDs consider credit ratings given by agencies and take the decisions. You need to understand that ratings by agencies don’t assure the safety of your deposits. You need to analyze the company also before investing in it. Check the company’s profits in the past few years. Also, research a bit about the company’s future plans.
2. Interest Rate: Corporate FDs offer high-interest rates as compared to bank FDs. Some investors invest in these deposits on the basis of the high interest offered. But later on, these companies could collapse and the investors might have to face financial loss. So don’t get attracted to any of the offerings of the high-interest rate of the companies. If they are offering too high interest rates than other companies in the market then research a bit about them.
3. Regulations: Corporate FDs are regulated by Section 58(A) of the Companies Act 1956. As per which in case of turmoil the company will give first preference to equity shareholders over fixed deposits. This makes corporate FDs riskier.

Conclusion

All investments carry some amount of risk. In the same way, corporate FDs too carry risk. But with this high risk comes higher returns. So before investing in FDs have a thorough research on the company and then consider investing.