Most people only think of bank fixed deposits when they talk about fixed deposit schemes. But, a corporate fixed deposit can provide higher interest rates than a bank fixed deposit. A corporate fixed deposit may provide an interest rate that is 1% to 3% more than a bank fixed deposit. However, these fixed deposits are regarded as insecure because they are not supported by any insurance. Here is everything about corporate fixed-income investments and what to consider before investing.
A corporate fixed deposit scheme is a kind of fixed deposit offered by corporations or firms, such as non-banking financial companies like Bajaj Finserv. Similar to banks, these companies gather deposits for a set period at a fixed interest rate. Also, these deposits offer guaranteed returns and allow you to customize the duration based on your needs.
Additionally, corporate FDs have higher interest rates than those offered by banks. So, these FDs are perfect if you want to invest in fixed deposits but anticipate a little higher interest rate. However, the higher profits in corporate FDs also come with a larger risk, so keep in mind that risk and returns go hand in hand. Therefore, it is essential to comprehend how FDs function before investing your hard-earned money in them.
Here are the factors to consider when investing in fixed deposits:
1. Company’s track record-
Many investors look at the company’s ratings from rating organisations when making an assessment. It’s crucial to realise that a higher rating does not ensure the security of your money. You should look at how profitable it has historically been in addition to the rate of the company. You can view a company’s track record as positive if it has continuously been profitable. Additionally, examining and evaluating the company’s plans is a good idea.
2. Potential risk-
Investors may prematurely withdraw their deposits from FDs, increasing the risk of default. A firm may find it challenging to repay even the principal amount under several circumstances. As a result, an investor needs to be aware of the company’s liquidity status before investing in its FD. Rating agencies rate FDs depending on their credibility, which can assist you in making a wise choice. It is recommended to favour corporate deposits from organisations with grades of AA or better. However, remember that there is always some element of risk and that a higher grade does not imply greater safety.
The Banking Regulation Act of 1949 strictly adheres to RBI norms and governs bank FDs. As opposed to corporate FDs, which are subject to corporate oversight and are governed by Section 58-A of the Companies Act of 1956. According to the Act, it must prioritise equity shareholders over fixed deposit holders if a corporation faces financial difficulties. This increases the risk for even the finest corporate FDs.
4. Interest rate-
Different banks and businesses offer different interest rates on corporate and bank FDs. Many depositors are attracted by the extraordinarily high-interest rates financial institutions offer and put their money at risk by investing in failing businesses. It is advisable to take the required safeguards to avoid being duped by those advertising an abnormally higher interest rate than the market rate. Your goal should be to generate a competitive interest rate on your principal while investing in a low-risk financial instrument. You must use an online FD calculator to find out how much interest you will get at the end of the term.
Corporate FDs typically have a duration of 1 to 5 years. You should use your capital in a fixed deposit throughout this time. You can choose the FD tenure depending on what you want to invest in. You can choose to make a premature withdrawal if you require the money before the FD’s tenure expires. However, the majority of businesses have a 3- to 6-month ‘lock-in’ term for corporate deposits, during which you cannot withdraw your money.
6. Additionally, businesses often charge for a premature withdrawal if you liquidate your investment before the term is up. This means you receive less income than you anticipated. The corporate fixed deposit scheme with a minimum lock-in term and minimal early withdrawal fees is the one you should select.