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

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Compared to bank fixed deposits, company/corporate fixed deposits offer higher interest rates but carry a greater degree of risk. The Deposit Insurance and Credit Guarantee Corporation (DICGC) insures bank fixed deposits of up to 5 lakhs, but not corporate fixed deposits; consequently, company FDs are affected in the event of defaults. Corporate FDs are provided by financial institutions such as non-banking financial companies (NBFCs) and others.

Before investing, investors should investigate the credit rating of these company fixed deposits to determine the institution’s legitimacy. A higher AAA rating indicates a lower probability of defaulting on interest and principal payments. Bajaj Finance Fixed Deposit has been rated CRISIL AAA/Stable and [ICRA]AAA(Stable) for AAA rated company fixed deposits (FDs), and the company is now offering annual interest rates ranging from 7.05% to 7.50% for terms ranging from 12 months to 60 months.

popular Company’s FD rate pic.twitter.com/FDbZqoy10z

— Vishal Bandhara (@weesal19840115) November 18, 2022

The Mahindra Finance fixed deposit has interest rates ranging from 6.75 percent to 7.50 percent and a rating of “IND AAA / Stable.” CRISIL has given LIC HFL fixed deposits a rating of AAA/Stable, and the company offers terms ranging from 1 to 5 years at interest rates between 6.75 and 7.50 percent. Sundaram Finance fixed deposits have maintained a AAA rating for the past 30 years, and their interest rates range from 7.20% to 7.50%.

The aforementioned AAA-rated companies offer significantly higher interest rates on fixed deposits than SBI, HDFC Bank, ICICI Bank, Axis Bank, Kotak Mahindra Bank, and other prominent banks. However, let’s discuss whether debt investors might consider investing in corporate fixed deposits for higher returns.

Head of Marketing at Epsilon Money Mart, Zubin Daboo, stated, “Investors are captivated by the growing popularity of Corporate FDs and the attractive returns they offer. Many advisors have begun to invest a portion of their clients’ portfolios. However, there are risks involved, as there is no assurance of capital safety. As they hold various forms of paper, default risk exists. If the company whose paper the investor is holding experiences a rough patch or goes out of business, the investor could be in jeopardy, whereas the likelihood of the same happening in the case of a Bank FD is negligible.”

“Corporate FDs may not be the most tax-efficient investment option, particularly if you are in a higher tax bracket. The profit from a Corporate FD is subject to your tax rate. In the event of an early withdrawal, factors such as the lock-in period, penalties, and interest loss are also involved. Corporate FDs may be suitable for investors who do not require emergency liquidity and have a short-term outlook of one to three years, and they should be included in your asset allocation if they fit your risk profile and you’ve consulted with your financial advisor.