When thinking of safe savings, most of us always home in on fixed deposits (FDs) offered by banks. And rightly so, because such FDs have many advantages, such as: interest rates ranging from 8.5% to 9.5%, tax savings, and the facility of premature withdrawal, if required. But have you ever considered corporate FDs, which offer higher returns?
Recently, some Indian banks reduced the interest rates on deposits by 0.25%-0.75%, which has made corporate FDs even more lucrative.
What exactly are Corporate FDs?
Corporate FDs, or non-convertible debentures (NCDs), are similar to bank FDs except that they are offered by corporates and not financial institutions or banks. Corporate FDs are, basically, fundraising exercises through which a corporation raises money for running its business. Here, the investor’s (your) money is used for repaying existing loans, expanding businesses, optimizing business plans, and other similar activities. Some of the popular corporate offering FDs come from Mahindra Finance, Gati, DHFL, PNB Housing and Bajaj Finance.
What’s good about Corporate FDs
The first question on your mind must be: what makes corporate FDs better than regular FDs? And the answer to the same lies in the points below.
- Rate of interest: Corporate FDs offer higher interest rates than those of a bank, in the range 9%-13%. Some companies offer even higher interest rates to senior citizens.
- Credit ratings: Corporate FDs are rated by independent rating agencies, such as CRISIL, ICRA and CARE, which assess the credit worthiness of the issuing companies. On the other hand, credit ratings are not applicable in the case of bank FDs.
- Interest payments: Investors can choose the frequency of interest payments: monthly, quarterly, half-yearly, annually, or on a cumulative basis. This option offers investors with an additional source of income.
Not all is hunky dory about Corporate FDs
Before you take a plunge in Corporate FDs market, you should measure its pros against the below-mentioned cons.
- FD term: Banks offer multiple term options for investing, starting from 30 days. On the other hand, the typical time frame of a corporate FD ranges from 1 year to 8 years.
- Withdrawals: Bank FDs are easy to withdraw, whereas withdrawing from a corporate FD can take up to a few weeks.
- FD insurance: RBI’s Deposit Insurance and Credit Guarantee Corporation (DICGC) insures bank deposits of up to Rs 1 lakh. The same cannot be said though for the Corporate FDs.
- Risk Quotient: Corporate FDs come with higher risk as they are unsecured. If a company defaults, the investor stands to lose significant amount of the invested money. To minimize risk, it is advisable to invest in companies with high credit ratings.
Make a note of, when investing…
Before investing in a corporate FD, one of the good initial filters is checking the company’s credit rating and the corresponding rating agency. The investor can check the company’s track record in dealing with investors and depositors. Hence, credit ratings and investor goodwill should be the key deciding factors.
Go for the Corporate FD if you:
- are comfortable with lower or no liquidity
- have seen the credit ratings and are comfortable with the sector and the brand (company)
- are seeking returns higher than bank FDs
Table 1: Pros and Cons
Rate of Interest
Interest payment flexibility
Table 2: Some of the Current Corporate FDs
Min. Investment (Rs.)
Mahindra Finance Ltd
CRISIL – FAAA
CRISIL – FAAA, ICRA – MAAA
Bajaj Finance Ltd.
CRISIL – AAA, ICRA – MAAA
CRISIL – FAA+
LIC Housing Finance
CRISIL – FAAA
Shriram Transport Finance Ltd – Shriram Unnati.
CRISIL – FAA+, ICRA – MAA+
By Naveen Kukreja, Director, PaisaBazaar.com
(First published in Business Insider on 6 Feb 2015)