Your Questions Answered: What are corporate FDs and how are they different from bank FDs?

Q. I am a 45-year-old physician working with a government hospital. I have been investing in mutual funds and equity since the past 20 years. I wish to now diversify and invest in fixed-income assets. I have invested a certain portion of my corpus in bank fixed deposits. Many friends have advised me to invest in corporate fixed deposits too. Can you please elaborate on what corporate fixed deposits are and how they are different from bank fixed deposits?

Fixed deposits (FDs) are one of the most popular investment options in India. They offer guaranteed returns, safety of capital and easy liquidity. However, not all FDs are the same. There are different types of FDs offered by different entities, such as banks, non-banking finance companies, post offices, and corporates.

What are corporate fixed deposits?

Corporate fixed deposits or company fixed deposits are term deposits kept for a set amount of time at a set interest rate. Financial institutions such as non-banking financial companies (NBFCs), provide corporate fixed deposits. Many corporate FDs have maturities that can range from a few months to a few years. Like banks, RBI permits selective NBFCs to accept deposits for a fixed interest rate and tenure. Such deposits are known in the common parlance as company or corporate fixed deposits.

Difference between corporate FDs and FDs from banks

The main difference between corporate FDs and bank FDs is the interest rate. Corporate FDs usually offer higher interest rates than bank FDs, as they have to compete with banks to attract deposits. The interest rate on corporate FDs depends on various factors, such as the credit rating of the issuer, the tenure of the deposit, the amount of the deposit, and the prevailing market conditions.

Another difference is the safety of the deposit. Bank FDs are insured by DICGC up to Rs. 5 lakh per depositor per bank. This means that if a bank fails, you can get back your money up to Rs. 5 lakh from DICGC. However, corporate FDs are not insured by any agency and hence carry a higher risk of default by the issuer. Therefore, it is important to check the credit rating of the corporate FD before investing in it.

A third difference is the tax treatment of the interest income. Both bank FDs and corporate FDs are subject to tax deducted at source (TDS) at 10% if the interest income exceeds Rs. 40,000 in a financial year (Rs. 50,000 for senior citizens). However, bank FDs also have an option to submit Form 15G or 15H to avoid TDS if your total income is below the taxable limit. Corporate FDs do not have this option, and hence TDS is deducted irrespective of your income level.

Pros of investing in corporate fixed deposits

The main advantage of investing in corporate FDs is that they tend to offer higher returns than bank FDs. In times of high market volatility and uncertain returns, corporate FDs help you secure your future financially with fixed, predictable returns.

Another advantage of investing in corporate FDs is that they offer more flexibility in terms of tenure and amount. You can choose a tenure that suits your financial goals and liquidity needs, from as short as 3 months to as long as 10 years. You can also choose an amount that fits your budget, from as low as Rs. 5,000 to as high as Rs. 1 crore or more.

A third advantage of investing in corporate FDs is that they offer various payout options for your interest income. You can opt for the cumulative option, where the interest is compounded quarterly or annually and paid at maturity along with the principal; or the non-cumulative option, where the interest is paid monthly, quarterly, half-yearly or annually as per your preference.

Cons of investing in corporate fixed deposits

The main disadvantage of investing in corporate FDs is that they carry a higher risk than bank FDs. As mentioned earlier, corporate FDs are not insured by DICGC, and hence they are relatively riskier than bank fixed deposits.

Things to keep in mind before investing in corporate fixed deposits

Credit rating of the issuer: Choose corporate FDs issued by companies with a high credit rating to minimise credit risk.

Tenure: Consider your financial goals and choose a suitable tenure that aligns with them.

Interest rate and payout frequency: Compare interest rates offered by different companies and choose the one that best suits your needs.

Liquidity options: Understand the withdrawal terms and conditions before investing, especially if you may need access to your funds before maturity.

Tax implications: Be aware of the tax implications of investing in corporate fixed deposits, especially if you are in a higher tax bracket.

Investment amount: Diversify your portfolio by investing in a mix of corporate FDs and other low-risk instruments to manage risk.

In conclusion, while corporate FDs offer the potential for higher returns compared to bank FDs, they come with higher credit risk. Carefully consider the pros and cons, conduct thorough research on the issuing company’s creditworthiness, and consult with a financial advisor before investing to ensure it aligns with your financial goals and risk tolerance.

Disclaimer: This is not an investment advisory. The article above is for information purposes only. Investments in the securities market are subject to market risks, read all the related documents carefully before investing. Past performance is not indicative of future returns. Please consider your specific investment requirements, risk tolerance, goal, time frame, risk and reward balance, and the cost associated with the investment before choosing a fund that suits your needs. The performance and returns of any mutual funds can neither be predicted nor guaranteed.

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Note: This is for informational purposes. Please speak to a financial advisor for detailed solutions to your questions.