Company FD gives higher returns than banks: What should investors do?

 

• Compared to bank fixed deposits, company/corporate fixed deposits offer higher interest rates but also involve a higher degree of risk.

Compared to bank fixed deposits, company/corporate fixed deposits offer higher interest rates but also involve a higher degree of risk. The Deposit Insurance and Credit Guarantee Corporation (DICGC) covers bank fixed deposits up to ₹5 lakh, but not corporate fixed deposits; Consequently, in the event of a default, the company FD gets affected. Financial organizations like Non-Banking Financial Companies (NBFCs) and other corporates offer FDs.

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

ICICI HFC Fixed Deposit is rated AAA/Stable by CRISIL, AAA/Stable by ICRA and AAA/Stable by CARE, and promises interest rates ranging from 7.00% to 7.50% for tenors ranging from 12 to 120 months Is. HDFC Limited Fixed Deposits have received AAA ratings from both CRISIL and ICRA for 28 consecutive years HDFC Company FD interest rates range from 6.85% to 7.20% with tenures of 12 to 120 months.

The interest rates on Mahindra Finance Fixed Deposit range from 6.75% to 7.50% and it is rated "IND AAA / Stable". CRISIL has rated LIC HFL Fixed Deposit as AAA/Stable, and the firm offers an interest rate of 6.75% to 7.50% for tenures ranging from 1 to 5 years. For the past 30 years, Sundaram Finance Fixed Deposit has maintained an AAA rating, and its interest rates vary from 7.20% to 7.50%.

The interest rates on fixed deposits offered by the above AAA-rated companies are much higher than those offered by SBI, HDFC Bank, ICICI Bank, Axis Bank, Kotak Mahindra Bank and other leading banks. But let us talk about whether debt investors can consider investing in Corporate Fixed Deposits to earn higher returns.

Zubin Dabboo, Head - 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 have also started adding some proportion to their clients' portfolios. But there is some risk involved – namely there is no guarantee of capital safety. Default risk exists because they have all kinds of paper. If the company whose paper is held by the investor goes through a rough patch or gets shut down, the investor may be in trouble, same is negligible in the case of bank FDs.

“Corporate FDs may also not be the most tax efficient, especially if you fall under a high tax bracket. The profit from corporate FD is taxable as per your tax slab. Factors like lock-in period, penalty and loss of interest are also involved in case of premature withdrawal. Corporate FDs can be suitable for investors who do not have emergency liquidity needs and have a short term vision of 1-3 years and should be a part of your asset allocation, if it suits your risk profile And after checking with your financial advisor," said Zubin Dabboo.

CA Manish P. Hinger, Founder, Fintu said, “When it comes to Company/Corporate Fixed Deposits, this bank offers higher interest rate as compared to Fixed Deposits. However, corporate FDs carry a higher level of risk as compared to bank fixed deposits. Investors must check the credit rating of these Company Fixed Deposits to check the credibility of the issuer before investing their money. Higher rating means less chance of default in repayment of interest and principal. On the other hand, a lower rating means a higher risk of default."