Safety is a very important factor when you make an investment. There are a variety of investment options available to you, beyond Fixed Deposits. You might prefer to invest in Bank Fixed Deposits because of lower risk. In much the same way, if you are an investor willing to bear moderate risk, then do look beyond Fixed Deposits. Why not try your hand at Corporate Fixed Deposits?
To help you make smart decisions and get more clarity on Corporate Fixed Deposits, these are the 5 things you should know on Corporate Fixed Deposits. Read on!
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They are just like Bank Fixed Deposits with an exception that not banks but Companies accept them.
Companies need and raise funds for their operations and expansions from banks and other financial institutions. Companies can also raise funds from you and other investors, in the form of Company Fixed Deposits. These deposits where you park money with Companies, earn a slightly higher interest compared to banks. Unfortunately, they don’t enjoy the same level of safety as FDs.
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Yes, Corporate Fixed Deposits offer higher interest rates. But, why take a chance? Check the company’s finances. Just like you are given a credit score by CIBIL on availing loans, companies also have credit ratings. You must check the financial strength of a Company by checking their credit rating. A Company which enjoys AAA rating is quite safe. Compare the credit ratings from multiple agencies. Do not go for a particular company FD, just because you are familiar with their products. A good product is no guarantee of a good Company.
Do a background check/verification before investing in a Company FD. Study the current financial position and also the past performance. Do not get lured by a company, just because they are offering a higher rate of interest. Check for liquidity by taking a close look at the Financial Statements. Take a look at their management. If you sense any kind of trouble especially with Corporate Governance, stay far away.
Companies treat their Deposits as pure ‘unsecured loans’. Therefore, you should know that your Corporate Fixed Deposits are pure unsecured loans. You will have no security in the form of collateral like the company’s assets. The company doesn’t pledge any of its assets, and you will not have any claim over the company, if it doesn’t return your deposits on maturity.
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The reason you should go for Corporate Fixed Deposits is because companies offer a higher rate of interest compared to banks. But, the whole purpose of such an investment is defeated, if you fall under the higher tax bracket.
What will remain in your hands if you pay a higher tax on interest earned on Corporate Fixed Deposits? Interest earned and tax paid will be set off and you will have nothing left. So, if you fall in the higher tax bracket, you should stay away and not invest in Corporate Fixed Deposits. Look instead for other investment options with similar risk like short-term debt funds, mutual funds or tax-free bonds.
Check if the company is offering a cumulative scheme or a regular income option. In case of a cumulative scheme, the interest earned gets invested in other avenues. Hence, in the end, you’ll have a lump sum amount in hand.
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