Money does not grow on trees, but it may be encouraged to expand with the right investments and savings. Many of us want to minimize or limit our exposure to high-risk assets while increasing our low-risk holdings.

Bonds, debentures, certificates of deposit, debt funds, and fixed deposits are all safe debt instruments. Despite the variety of investment options available, many risk-averse people still prefer Bank Fixed Deposits (Bank FDs). Because of its simplicity, it is a favorite in every Indian household.

Sure, your money is safe at the bank, but your savings account will only pay you a minimal rate of interest on the money you have saved. FDs from banks and corporations are two options for diversifying your portfolio.

Many businesses and non-bank financial institutions (NBFCs) find that acquiring capital through fixed deposits is a convenient option. Like bank FDs, corporate FDs offer fixed and predictable returns.

In addition, unlike debt instruments, Corporate FD returns are unaffected by interest rate market movements. The normal maturity length for is 1 to 5 years.

Corporate FDs typically offer a 0.5 percent to 3% higher interest rate than bank FDs for similar maturities. Corporate FDs can have interest rates as high as 7-8 percent.

Once you’ve locked in a rate, you’ll be able to keep it until your deposit matures. You can also borrow up to 75 percent of the value of your corporate fixed deposit as a loan.

Eligibility for CFDs and how to apply

A Corporate FD can be invested in by individuals, non-resident Indians (NRIs), and senior persons over the age of 18.

On corporate FDs, senior citizens often earn a 25-30 basis point higher interest rate than the current rate (those above the age of 60).

  • Minors with the assistance of a parent or guardian can also open an account.
  • Fill out the application form and provide your KYC information to make deposits either offline or online.

How do you choose the finest corporate fixed deposit to put your money into?

There are three things to think about.

  • The Ratings: These term deposits are widely graded for their credibility by a few rating organizations like ICRA, CARE, CRISIL, and others. Companies with credit ratings ranging from AA to AAA face a moderate to high risk of defaulting on interest payments. As you move down the rating table, the degree of safety drops.
  • Parentage: We must evaluate the chance of receiving support from a higher-rated parent in the event of a crisis when judging business quality. The corporate governance standards of the Group and the number of years it has been in operation. A strong parent might reassure an investor.
  • The Interest Rate: A corporate FD’s interest rate is the most important factor. The interest rates are far higher than those offered by a traditional bank FD. Before choosing an interest rate, it is necessary to evaluate and examine them. Some NBFCs and organizations offer higher interest rates for the same duration than others.

Is it safe to put money in a fixed deposit with a company?

All NBFCs and organizations that want to take deposits must adhere to the RBI’s and Ministry of Corporate Affairs’ rigorous rules and regulations (MCA). As a result, only a few institutions are licensed to accept retail investor deposits.

Rating bodies such as CRISIL, CARE, and ICRA rate corporate FDs. AAA (the highest rating) deposits are thought to be safer than AA, A, or BBB deposits. It’s worth mentioning that only businesses with the least BBB rating can accept deposits (better than investment grade).

Although actions like these can reduce risks, they aren’t “risk-free.” Corporate FDs may be in danger of default if the company’s financial status deteriorates. In this case, it may be difficult for the company to pay interest or, in the worst-case scenario, the entire invested principal amount.

Changes in a company’s financial status may not always be detected by credit rating agencies. As a result, the rating isn’t always reliable. As a result, picking the right Corporate FD is crucial. Select only those rated ‘AAA’ to decrease the risk of default.

As you may be aware, the Reserve Bank of India’s Deposit Insurance and Credit Guarantee Corporation guarantees bank deposits up to Rs 5 lakh. This ensures that even if a bank goes bankrupt, its customers’ deposits will be safe. Corporate FD depositors, on the other hand, are not entitled to this benefit.

Furthermore, the interest earned on a corporate fixed deposit is taxed based on your tax bracket. Your after-tax return may not only be less enticing, but it may also fall short of inflation if you’re in the highest tax rate. Such investors have other tax-efficient options, such as debt mutual funds.

While the higher interest rates on Corporate FDs may attract you to invest in them, you should be aware of the hazards before proceeding. Diversifying your Corporate FD assets across several companies may also be beneficial.

Things to consider when investing in Corporate Fixed Deposits:

Some of the most essential dangers to consider when investing in Corporate Fixed Deposits should not be disregarded.

  • Verify that the company has been paying interest to its shareholders regularly.
  • For at least three years, the companies’ financial statements have shown a consistent track record of earnings.
  • Given the growing number of start-ups on the market, make sure the company has been in operation for at least 5 years.
  • Examine their returns to see if they’re realistic (2-3 percent more than a bank FD).
  • Don’t be deceived by enterprises that promise extraordinarily high returns but have an unsustainable risk-reward ratio; listed businesses will be closely controlled.
  • To limit risk, diversify your investments rather than putting all your eggs in one basket.
  • Don’t be duped by misleading marketing; instead, calculate the CAGR and compare it to others.

Finally, is your investment made at the right time? You will obtain the best returns on your FD if you invest when interest rates are high, but you must also factor in inflation.

Investing is the act of putting money aside today for the better tomorrow.