Dos and Don’ts of Corporate FDs

When it comes to investments, all of us would like to earn higher and secured returns. If you also belong to the same category, corporate Fixed Deposits (FDs) pose a good option in these times of high inflation and inflation FD rates. However, one needs to look at following aspects of corporate FDs to understand the characteristics and nature of returns to understand this investment instrument.

Characteristics

1. Corporate FDs usually earn higher interest rates as compared to bank FDs.

2. Like bank FDs, they are good source of monthly, quarterly, half-yearly or yearly interest income.

3. The tenure is flexible, ranging from six months to seven years.

4. Also, there is no tax deduction at source for FDs earning interest of up to Rs 5,000 a year.

5. Unlike bank FDs, corporate FDs give you an option to choose a nominee for your investment.

6. In addition, the operational process is hassle-free, resulting in easy opening of corporate accounts. In some cases, even PAN card is not allowed.

7. On the other hand, corporate FDs are not as secured as bank FDs as all the returns shown are projected and not guaranteed. It means that even if the projected interest rate is of 9 per cent, the returns actually received will be lesser, let’s say, 5 per cent or so.

Comparison of Well-Known Corporate FDs

Rating Decoder

Fixed deposits are credit rated by independent credit rating agencies such as CRISIL, ICRA, etc. Credit rating agencies give ratings to debt instruments on basis of detailed study of the financial and non-financial performance of the company that issues fixed deposit schemes. The rating reveals whether the company will be able to repay the promised amount at maturity or not.

After decoding the ratings of corporate FD, it is important to decide on the basis of the following factors to ensure safety of your money:

1. If rating is same for more than one company, choose the one with better reputation. It necessarily gives an edge to choose a company with better market reputation and performance record, as it will increase the chances of getting good returns. Also, it further decreases the chances of default.

2. Check promoter’s credibility. Credibility, here, includes director and other key persons of the company. Persons known for bad credit discipline and companies with bad repayment track records should be kept away from portfolio.

3. Do not park huge amounts in one company. In case you have huge amount to invest in and find corporate FDs suitable enough, try to diversify your investments by investing in 2-3 different companies, with different investment horizons. This would minimize the chances of loss, even if one of those corporate FD is not giving good returns. Also, it would be advisable to find out whether the funds accumulated were used for stated purpose or not.

4. Invest only if no premature withdrawal is foreseen as premature withdrawal in corporate FDs is difficult to deal with. There are real time instances, where it has been more than 5 years of FD maturity, but the investors are still waiting for proceeds.

Here, if the goal is of utter importance, for which money cannot be compromised, it is advisable to invest in bank FDs, instead of corporate ones.

Issues With Corporate FDs

1. Default risk: These companies’ FDs carry ‘Default Risk’, which means, at maturity they might not be able to return at projected interest rate and default in payment.

2. Unsecured investments: Bank fixed deposits are backed by RBI’s insurance for securing amount up to Rs 1 lakh. It means that in case you have invested in bank FD, you will get Rs 1 lakh, even if the bank defaults in paying you back. However, there is no security like this in corporate FDs, resulting in investor losing all his money.

3. Operational risk: Another problem with corporate FDs is that the companies are slow and irresponsible in maintenance and updation of FD holders’ records. Because of this, there can be instances of delayed documentation like receipt of FD, other papers, etc. Also, it can cause problems in case of change of address, etc. as it may take longer.

4. High sales commission attached: The corporate houses, generally, pay hefty commissions to their sales agents to push their FDs well in market. As a result, sales agents do indulge in mis-selling, keeping investors’ unaware of the critical aspects of the instrument.

Although we do not say that all the corporate fixed are bad, we only recommend you to take time and study the company before investing in their fixed deposits schemes. In case you have checked these facts and you find that the fixed deposit you are interested in scores good in all those parameters that mattered, your risk will be minimized.