With consecutive rate cuts by RBI, fixed deposits rates offer by Banks came down drastically. In the current fiscal year RBI has reduced 125 bps in repo rate which results in reducing fixed deposits rates by 50 bps to 100 bps by almost every bank.
In this declining rate scenario, a 9.50% to 10% p.a. corporate fixed deposit looks attractive in comparison to 8% to 8.50% p.a. fixed deposit offers by banks. Though the difference is not quite high but if you calculate the difference of this one or two percentage for 10 to 15 years, the difference will be quite huge.
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Evaluating Corporate Fixed Deposits Schemes
Reserve Bank of India has directed banks to assess Corporate diligently before giving out loans. This due diligence has made difficult for the corporate to get loan from banks thus, they take route of raising funds through public. Non-Convertible Debentures and Fixed Deposits are two ways for corporate to accept public deposits. Both of them have their own pros and cons but the two usually offer 1% to 2% higher than bank fixed deposits. However, companies in no case can offer interest rates more than 12.5% p.a. as capped by Ministry of Corporate Affairs (MCA).
Why to invest in Corporate Fixed Deposits?
The answer is pretty obvious, the corporate fixed deposit schemes offers higher interest rates for the same tenure in comparison of bank fixed deposits. But before getting excited and invest in corporate fixed deposit, one must know few caveats attached to it.
How to Choose Best Corporate Fixed Deposit Scheme?
- Credit Ratings
Credit Rating agencies gives ratings to corporates after assessing various aspects which includes their earlier repayment, delayed payment of interest etc. This is the first and foremost thing which an investor should consider while making investment decision. Even if any company offering high interest rates but low or no credit ratings, it should be weeded out from the list.
There are only handful of credit rating agencies in India which includes CRISIL, CARE, ICRA, Fitch etc.
- Inherent Risk
Corporate Fixed Deposits are not secured and are not safe as Bank Fixed Deposits. Chances of not getting back your money is high as there are no regulatory body governing corporates as like RBI in case of banks. However, there are credit rating agencies which give ratings to company after assessing various aspects including repayment but still the chances of default by company is pretty high.
- Interest Rates
As we all know that longer tenure tends to fetch high interest rates but an investor should be precautious that high interest rate comes with high risk. Company offering high interest rates may not be able to serve the interest payment or maturity amount on time. Despite of having high credit ratings it is highly advisable not to go with longer tenure in Corporate Fixed Deposits.
Further, there are two types of plans offered by corporate fixed deposits: Cumulative and Non-Cumulative. Under non-cumulative plans you can choose to receive the frequency of accrued interest i.e. monthly, quarterly, half-yearly or yearly. While under cumulative plans you will get interest along with the principal amount at the time of maturity only.
Benefit of opting cumulative plans is it will fetch you high interest rates due to compounding while non-cumulative plans will get you simple interest. But not all corporate fixed deposits comes with cumulative option, you should enquire with the concern company.
- Tax Treatment
Parking your money in corporate fixed deposits does not give you tax benefits on the invested amount or for the interest income. You have to include the interest income under ?Income from Other Sources? and have to pay tax as per your slab rates.
In case your yearly interest income exceed Rs.5,000 than company would deduct TDS at 10% and deposit it with the Central Government on your behalf.
- Premature Withdrawal
Similar to Bank Fixed Deposits, Corporate Fixed Deposits also levy penalty on premature withdrawal. The penalty varies from company to company, so you should read the rules before investing.
- Special Interest Rates
Most companies offer special interest rates of 0.25% for senior citizen or for their employees. Some companies also offer special schemes with interest rates such as PNB housing finance limited gives 8.35% interest for 15 months FD under special deposit while for the same tenure under normal deposit you would get 8.25% interest.
Some of the popular corporate houses accept online application for fixed deposits such as HDFC Ltd., ICICI housing finance ltd. etc. You can invest in these companies through online investment platforms such as icicidirect.com, fundsindia.com etc.
Top Corporate Fixed Deposits Schemes with Interest Rates
Some of the best and top rates corporate fixed deposits scheme with interest rates
Do and Don?t for Corporate Fixed Deposits Investors
- Always choose company having high ratings of AAA or AA. Avoid investing companies with no ratings or ratings below AAA or AA.
- Don?t judge company by its name because even establish companies with brand value have defaulted in payment.
- Don?t get lured by high interest rates as companies trap investors by offering high interest rates.
- Don?t put entire money in one deposit. Split the money across 4-5 top rated companies to diversify the risk.
- Track the credit ratings of the company regularly. If the ratings slip do not hesitate to withdraw your money even if it attracts small premature withdrawal penalty.
Should you choose corporate fixed deposits?
I personally do not invest or advise to invest in corporate fixed deposit because these are not secured and safe. There are many instances where investors are fighting to get their money back. Not only obscure company like Chain Roop Bhansali’s CRB Capital makes default, even top rated companies like Birla power Solutions, Llyods Finance, Kirloskar Investments and Finance, Morepan Laboratories, Micro Technologies, Escort Finance, DCM Financial Services, Plethico Pharma, Nagarjuna Finance, Duncan Industries, Omnitech Info etc. are in the defaulters list.
I would advise to go with debt mutual funds instead of investing in corporate fixed deposit. As debt mutual funds manages to give high returns of 10% to 12% in the last one year. However, some of the debt funds also invest in corporate fixed deposits but since they are managed by professional which take utmost care and due diligence before choosing any company.