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Company FDs offer more returns than banks: What should investors do?

 

In comparison to bank fixed deposits, company/corporate fixed deposits provide higher interest rates but also involve a higher level of risk. The Deposit Insurance and Credit Guarantee Corporation (DICGC) covers bank fixed deposits up to 5 lakhs, but not corporate fixed deposits; as a result, in the event of defaults, company FDs are impacted. Financial organisations such as non-banking financial companies (NBFCs) and others provide corporate FDs. 

Before investing their money, investors should look up the credit rating of these company fixed deposits to determine the legitimacy of the institution. A higher AAA rating indicates a lesser likelihood of interest and principal repayment defaults. When it comes to AAA rated company fixed deposits (FDs), Bajaj Finance Fixed Deposit has been rated CRISIL AAA/Stable and [ICRA]AAA(Stable) and the company is now offering annual interest rates ranging from 7.05% to 7.50% on tenors ranging from 12 months to 60 months. 

ICICI HFC Fixed Deposits has been rated AAA/Stable by CRISIL, AAA/Stable by ICRA and AAA/Stable by CARE, and promising interest rates ranging from 7.00% to 7.50% on tenors ranging from 12 to 120 months. HDFC Ltd fixed deposits has been rated AAA rating from both CRISIL and ICRA for 28 consecutive years, the interest rates of HDFC Company FDs ranges from 6.85% to 7.20% on tenors of 12 to 120 months. 

The interest rates on the Mahindra Finance fixed deposit range from 6.75% to 7.50% and it has the rating "IND AAA / Stable." CRISIL has given the LIC HFL fixed deposits a rating of AAA/Stable, and the firm provides interest rates ranging from 6.75% to 7.50% on terms ranging from 1 to 5 years. For the past 30 years, Sundaram Finance fixed deposits have maintained a AAA rating, and its interest rates vary from 7.20% to 7.50%. 

Interest rates on fixed deposits offered by the aforementioned AAA-rated companies are significantly higher than those offered by SBI, HDFC Bank, ICICI Bank, Axis Bank, Kotak Mahindra Bank, and other prominent banks. But let's talk about whether debt investors might think about making investments in corporate fixed deposits to achieve higher returns.

Zubin Daboo,Head of Marketing, Epsilon Money Mart said “The growing popularity of Corporate FDs and the attractive returns they offer have caught the attention of investors. Many advisors too have started to add certain proportion in their client’s portfolio. But there are some risks involved - namely there is no guarantee for capital safety. The default risk exists as they hold paper of all kinds. If the company who’s paper the investor is holding goes through a rough patch or shuts down then there could be trouble for the investor, the same happening in the case of say a Bank FD is negligible."

“Corporate FDs also may not be the most tax efficient especially if you fall under a higher tax bracket. The gain from a Corporate FD is taxable under your tax slab. In case of premature withdrawal factors like lock in period, penalties and loss of interest are also involved. Corporate FDs may be suitable for investors who do not have emergency liquidity needed and have short term vision of 1-3 years and should be part of your asset allocation if it is suitable to your risk profile and after checking with your financial advisor," said Zubin Daboo.

CA Manish P. Hingar, Founder at Fintoo said “When it comes to Company/Corporate Fixed Deposits, it offers higher interest rates as compared to Bank Fixed Deposits. However, corporate FDs carry higher level of risk as compared to Bank Fixed Deposits. Investors should check the credit rating of these Company Fixed Deposits to check the credibility of the issuer before investing their money. A higher rating implies lower probability of defaults in interest and principal repayments. A lower rating on the other hand means higher risk of default."

“Apart from checking the credit rating, investors should know that company’s Fixed Deposits are not covered by Deposit Insurance and Credit Guarantee Corporation. Bank FDs on the other hand are covered up to 5 lakhs by DICGC. It means in case the bank defaults; your FD amount up to 5 lacs is insured but the same doesn’t imply to company FDs. Therefore, keeping the higher risk in mind, conservative investors should avoid investing their money in corporate FDs and only investors with moderate to aggressive risk profiles should consider having some exposure to these corporate FDs after fully understanding the risk involved," said CA Manish P. Hingar.

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