Corporate Fixed Deposit – Should You Invest?

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Are you planning to invest your surplus money into a fixed deposit? Then you should explore the option of corporate fixed deposit. A corporate fixed deposit will give you higher returns as compared to the traditional bank fixed deposit. In this article, I will compare the corporate fixed deposit with the bank fixed deposit and will check whether you should invest or not.

What is Corporate Fixed Deposit?

Whenever any company needs money it has two options. 1) it approaches the bank and takes a loan. 2) it approaches investors directly by offering interest against their money. The corporate FD is the investment instrument offered by corporate companies. The investor will have an option to invest in the corporate fixed deposit wherein he/she will get a higher rate of return as compared to bank fixed deposits.

Corporate companies have been rated by the rating agencies and based on their ratings investment decision can be taken. CRISIL is such one rating agency that rates the corporate companies in India. Usually, the interest rates offered on the corporate fixed deposits are higher than the bank fixed deposits.

Advantage of Corporate Fixed Deposit

  • Higher interest rates
  • Low risk with a high rating companies
  • Invest in fundamentally strong company
  • Fixed interest rate till the maturity
  • Good investment instrument for diversification in your investment portfolio
  • Short term to the long term investment option
  • High liquidity (Easy withdrawal)

Limitations of Corporate Fixed Deposit

  • Interest earned is taxable
  • Not suitable for the retired person seeking monthly income
  • Cannot avail loan against FD

Points to check while investing in a corporate fixed deposit

There are a few points you should check before making your investment decision into corporate FD. Let’s check these points to conclude whether corporate FDs are worth your investment or not.

Credit Rating of the Company

Corporate companies who wish to invite investors for fix deposit have to first go for a rating process. There are several rating agencies in India like ICRA, CRISIL, CIBIL, CARE, etc who does the credit rating of the company.

There are several factors that are being taken into consideration while assessing the credit rating of the company. Few of them are:

  • Debt to equity ratio of the company
  • Liquidity
  • A timely serving of financial obligation
  • Dividend payout
  • Principal to its investors

For example, Standard and Poor’s have assigned an “AAA” rating to HDFC bank in India. HDFC Bank is the first bank in India that has received such a high credit rating.

This rating indicates the highest credit quality and lowest credit risk for the fixed deposit schemes by the companies.

Liquidity

There is a lock-in period in the corporate fixed deposit. This lock-in period determines the liquidity of the product.

Liquidity = How quickly you can withdraw your money

Most of the corporate FDs have a lock-in period of 3 to 6 months. It is advisable not to withdraw money and wait till the maturity date, otherwise you will get lesser interest than that of withdrawal on maturity.

Interest Rates

As I mentioned above, the interest rates offered by the corporate are higher than the regular bank fixed deposits. This is the main reason people are tempted to invest in corporate FD.

Usually, the interest rates are higher by 1% to 2% as compared to the bank FDs. If you find any company is offering a higher interest rate by let’s say 5% to 6% than you should be cautious and should not invest in such fixed deposits. Longer the duration of the investment, higher will be the rate of interest offered on any Company FD.

Premature Withdrawal

The corporate FDs come with a lock-in period of 3-6 months. So you cannot withdraw your money for this period once invested. These companies levy a penalty if you withdraw money before the maturity date. This penalty is usually 25-50 bps.

Ideally, you should not break the fixed deposit until it is a compulsion. You must check the premature withdrawal clause before making your investment decision in the corporate fixed deposit.

Tax Impact

Interest earned through corporate FD is taxable the same as your bank FD. As per the income tax rule, total interest earned up to Rs. 10000 is tax-free. Anything above that is taxable as per your prevailing tax slab.

So, if your cumulative interest earned is higher than Rs. 10000 you will have to pay tax on the interest earned on the fixed deposit.

Cumulative & Non-cumulative FD

There are two types of corporate FD available. One is cumulative wherein the interest earned is reinvested in the FD and investor will get the capital + interest earned at the time of maturity only.

While in non-cumulative FD, there is an option for interest payout on monthly, quarterly, half-yearly or yearly. At the time of maturity, you will get your capital amount back.

The interest rate on cumulative FD is much higher than that of non-cumulative FD as interest paid is again put back into the account and you will get the benefit of compounding.

Security

Money invested anywhere is carrying a certain risk. There is no investment option that is completely risk-free. Even the bank FD is risky as your capital invested in bank FD is insured up to Rs. 500000 only. (earlier this was only Rs. 1 lakh, in Union budget 2020 the insurance limit has increased to 5 Lakhs.

So there is always a risk attached to the investment instrument. But if you have invested in the high rating companies, the chances of risk is reduced.

Bank FD vs Corporate FD

Let’s compare the two types of fixed deposits.

Bank FDCorporate FD
Offered by BankOffered by Corporate Company
Lower Interest RatesHigher Interest Rates
Higher FD tenureLower FD tenure
Low RiskHigh Risk
Avail loan against FDCannot avail loan against FD

FAQs – Corporate Fixed Deposit

Can I get a higher interest rate in the corporate fixed deposit?

Yes, the interest rates are higher in corporate FD as compared to bank FD

Is Corporate FD riskier than bank FD?

All investment option in India carries a certain amount of risk. Yes, corporate FDs are slightly riskier than bank FD. But if you invest in the high rating company, the risk is lesser.

Do all corporate companies offer a fixed deposit?

No, not all corporate companies can offer a fixed deposit.

Can I avail loan against my corporate FD?

No, you can not avail loan against your corporate FD.

Can NRI invest in corporate fixed deposit?

Yes, few companies are allowing NRIs to invest in corporate FD

Do I have to pay tax on the interest earned through corporate FD?

Yes, the interest earned is taxable as per your income tax slab. There is a Rs. 10000 interest exempted as per the Income Tax Act.

How can I check the company rating?

The company rating is given on the investment paper of the company. Alternatively, you can also check the same on the credit rating agency’s website.

Conclusion:

The corporate fixed deposit is a good option if you want to earn extra interest. The instrument is suitable for the short term investment goal. This may not be suitable for the retired person who seeks fixed monthly income from their investment.

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