More or less, we all know about Bank Fixed Deposits. However, do we know what Corporate or Company Fixed Deposits are?
Corporate Fixed Deposits are deposits made by investors in Corporations and Non-Banking Finance Companies (NBFCs) for a particular time period at a fixed rate of interest. But why am I talking about corporate fixed deposits?
Corporate FD appears to be very attractive to those who are aware of the returns it promises. Lot of investors feel that it is similar to a Bank FD in terms of risk profile, but gives higher interest. In reality, it is different from the regular Bank FD in the sense that in this case companies issue these FD’s for expansion of its business and fulfilling cash requirements.
All you wanted to Know About Corporate Fixed Deposits
A company raises capital by issuing fixed deposits to the investors. The interest rate is generally higher compared to a Bank FD and is generally lies in the range of 9 – 15 %. These deposits are used by the company to fund its expansion and meet its cash requirements. A Corporate FD is just like a regular loan that we take from any financial institution. The company makes periodic payments i.e., interest payments, generally once a year, to all the investors in return for the deposit they made with them. However, sometimes, the interest payment can be done based on the investors’ choice. For example, if you want a monthly interest scheme, you just need to mention this at the outset and you will be given an option whether you want monthly, quarterly, semi-annually or annual interest payments. At the end of the deposit tenure the company repays the money deposited to all the investors.
You might be thinking that if corporate FDs are so lucrative, why are they not as popular as Bank FDs?
The reason is that these deposits are unsecured. If the company is unable to perform as expected or starts making losses, the interest payments may be skipped and in the worst case, if the company declares bankruptcy, the whole deposited money may be lost.
This is the reason why company fixed deposits offer a higher rate of interest, generally 2-3% more than Bank FD’s, to attract high risk investors who want better returns that what is offered by Banks.
Should you invest in Corporate FDs?
Going through the article you must be thinking whether investing in company FDs is a good idea or not. Considering the fact that it is unsecure and you may lose money if the company goes bankrupt then you might feel that it is not worth it. However, this is not true. Not all companies are bad, or rather mismanaged, that it will go bankrupt. Therefore, careful selection of the company is paramount in making your investment a success. There are a host of well performing companies who use this option as this is a cheaper method to raise money as opposed to borrowing from banks. If you do proper research about the company before investing, there is high probability that you will earn interest payments on time and that the company will meet its commitment to repay your deposit at the end of the deposit tenure.
How to decide which company’s FD is good?
To make sure that your invested money does not go down the drain, you need to research about the company before investing. You can keep the following points in mind while doing research on a company.
- Past History- Any company which has a strong track record of performance and profit generation for a period of at least 10 years would be a better choice than a newer company that is yet to establish itself. If the company had already issued such FD schemes in the past, then you can check if they made timely interest payouts and proper principal repayment. It will give you a good idea as to whether they will do the same with your deposits.
- Credit Rating- Checking the credit rating by credit rating agencies like CRISIL and ICRA, of the issue can give you a clear picture. A higher credit rating means that the security has credibility. These credit ratings are arrived at after studying the company extensively. Therefore, these ratings can be of great help for investors. A rating of AAA is considered to be more superior to AA rating. Generally, companies with lower credit ratings offer higher interest rates to attract investors for the additional risks they are taking.
- Term of investment- If you are planning to invest in corporate FDs, it is advisable that you go for a medium term of investment, i.e., invest for a period of 2 to 3 years. By choosing such tenure, you have the option of revisiting your decision about the security. If you feel that the company or the industry as a whole isn’t performing well, you can let your investment mature and look for better options. However, you don’t get this option if you invest for 5 or 10 years.
- Sector to which the company belongs- It is very important to make sure that the sector to which the company belongs is a well performing one. For example, the Indian aviation industry is going through turbulent times right now, especially Kingfisher Airlines. With the whole Aviation sector going through tough times, chances are that, any aviation company that is coming up with an FD issue may face difficulties in honouring their interest payment commitments. So, make sure that you study the sector of the company and figure out if the sector is expected to perform steadily over the next 2-3 years.
- Interest Rate- Another point to notice is the interest rate. If the interest rate offered by the company is very high, say 15%, then it shows that the company is desperate to raise money and is willing to offer an unusually high rate of interest to attract investors. It is advisable to stay away from such desperate companies.
To check out various Company and NBFC Fixed Deposits’ available in the market currently and the rate of interest they offer, click here. Any questions related to the various FDs can be asked by posting a comment below.
Things to Know Before Investing in Corporate FD
- Companies pay high commissions to brokers to push their company’s FD. Resist yourself from giving into the convincing appeal of such agents or brokers to go for a particular fixed deposit.
- You should regularly review company’s performance and its share prices in comparison with the overall market movements.
- Until your interest income from any such FD is less than Rs. 5000 per year, no income tax will be deducted at source (TDS) from such interest income.
- Diversify your portfolio of fixed deposits and thus reduce the risk by spreading them over number of companies in different industries. Don’t put more than 10% of your investment in any particular companies FD.
- Carefully preserve the papers like Fixed Deposit Receipt (FDR), you get from the company as proof of deposit, to avoid hardships at the time of getting your money back. You might get it after more than one month from application date.
- Companies offer various options related to the frequency of interest payout like monthly, quarterly, half-yearly or annual. There exists another option of interest accumulation and no payout. Delay the interest payout as much as possible. This will earn you interest on interest (compounding effect) and hence will generate higher interest yield on your investment.
Based on the above discussion, find below the name of some Corporate Fixed Deposits which you can consider:
|Name of the Company||Interest Rate (%)||Period|
|Mahindra Finance Ltd||10.5||36 months|
|Shriram Transport Finance Ltd||10.47||36 months|
|HDFC (Platinum)||10||15 months|
|LIC Housing Finance||9.5||60 months|
Corporate FDs are decent investment options. However, you need to make sure that you have left no stones unturned in doing the back ground research before investing.
Author – Rohit Roy & Vineet Patawari