Tips to Choose the Best Corporate Fixed Deposit

Tips to Choose the Best Corporate Fixed Deposit

In order to achieve higher gains from investments, it's necessary to diversify your portfolio. This can be done by investing your money in different asset classes like equity, debt, gold, etc. Where to invest depends on the individual’s risk tolerance, tenure, investment goal, etc.

When we speak of investing, fixed deposits are very popular among Indian investors. They are easy to understand and are less risky. But the majority of people are only aware of bank fixed deposits.

There also exist corporate fixed deposits. They offer higher returns as compared to bank fixed deposits and are good investment options for diversification. In this article, we will understand what are corporate fixed deposits and some tips to choose the best corporate fixed deposit.

What is Corporate Fixed Deposit?

Fixed deposit issued by companies that include NBFCs, Housing finance corporations, and financial institutions is defined as Corporate Fixed Deposits. These companies when require funds collect money from investors in the form of a fixed deposit. This deposit is for a specific period and offers a fixed rate of interest.

After the end of tenure, these funds are returned to investors with interest. The interest rate they offer is 2-4% higher as compared to bank fixed deposits. So those who want higher returns can think of investing in corporate FDs. But with higher returns come higher risk. These FDs carry higher risk as they are not covered by DICGC as bank deposits are.

Who are Eligible to open a Corporate Fixed Deposit?

The following kind of entities can open a corporate fixed deposit:

• NRI as well as Residential Individuals
• Co-operative firms
• Partnership firms
• Educational Organisations
• Societies and Clubs
• HUF Members
• Companies and Corporations

How to Choose the Best Corporate Fixed Deposit?

Corporate Fixed Deposits are offered by many companies. So, investors tend to get confused about where to invest. Here are some tips that can help you to choose the best corporate fixed deposits:

1. Evaluate the Credit Rating
   Corporate fixed deposits are given ratings by credit rating agencies. Those FDs with a rating of AAA or equivalent are considered more reliable and less risky. Those having lower credit ratings may offer high returns but are very risky. So, take the decision wisely.
2. Compare the Interest Rates
   Different companies offer different interest rates. So before investing in corporate FD do compare the interest rates offered by different companies. In general, long-term deposits have higher interest rates as compared to short-term deposits. Also, take care that the company offering too high interest is reliable or not. Check their previous repayment track. At times companies offering high-interest rates may default in making payments in the future. So, analyze the company before investing in FDs issued by them.
3. Company Reputation
   Before you invest in corporate fixed deposits, it's necessary to analyze the company’s history and reputation. Companies that have a good reputation in the market are considered more stable. There are fewer chances of them making a default. You can take advice from experts and invest in a reputed company.
4. Repayment History
   While selecting the corporate FDs you also need to assess the repayment history of the company. There have been cases where companies have defaulted in making payments to their investors. At times investors have received the maturity amount later than the specified date. This all needed to be checked before investing.
5. Liquidity
   Corporate FDs are for tenure ranging from 6 months to 5 years. You can select the tenure as per your goal. But corporate FDs are not as liquid as bank FDs. They generally come with a lock-in period of 3-6 months. You cannot withdraw the funds in this time period. If you do go for premature withdrawal you will need to pay a penalty. So, if you want liquidity then better choose the FD with a minimum lock-in period and premature withdrawal penalty.
6. Diversification
   It's never advisable to put all your money in a single bucket. Diversification is necessary to maximize returns and minimize risk. So instead of investing all your money in a single corporate FD, it's better to invest in multiple FDs of different companies. This will reduce the risk and provide safety against default.

Benefits of Corporate Fixed Deposit

Some of the benefits of corporate fixed deposits are as follows:

• Guaranteed Returns
  Corporate FDs offer guaranteed returns on your investment. Investors looking for safe investments can go for this option.
• Higher Interest Rate
  This is the main reason why people invest in corporate fixed deposits. They offer higher interest rates as compared to bank FDs. This makes them more attractive and makes investors earn higher returns.
• Periodic Interest Option
  In corporate FDs, you also have the option to avail of periodic interest. This means instead of getting interested at the time of maturity, you can get interest payout at regular intervals like monthly, quarterly, yearly, etc.
• Loan against FD
  When in need you can also get a loan against corporate FD. These loans are up to 75% of the maturity amount.

Conclusion

Corporate FDs are a good option to increase your returns and diversify your portfolio. But do analyze the company and repayment history before investing in FDs. Credit ratings given by rating agencies can be helpful in this.

References Used:

1. scripbox.com
2.