Fixed Deposits are common and favorite deposits for investors who want returns regularly. Most people think of banks when they hear the term Fixed Deposits, but there is also a better option in FDs apart from banks. These are known as Corporate FDs, and they offer higher interest rates compared to the banks. However, these are unsecured and are not backed by any collateral.
The investor invests a lump sum amount of money in a fixed deposit and then receives interest periodically till the Fixed Deposit is matured. Here, maturity is a specific period for which an investor invests money. Bank FDs are the most popular, but much like banks, other institutions can also collect money in Fixed Deposits. A few such as corporates, NBFCs, and financial institutions raise money for their present or forthcoming operations.
Before investing in Corporate Fixed Deposits, it is important to understand how corporate FDs work.
Corporates collect money from people in the name of Fixed Deposits for a particular timeframe. This money is then utilized for that particular time provided a fixed interest rate is given by the company to each individual whose money is being utilized. A corporate can find it easy to raise capital for financial and productional operations by using Fixed Deposits as they are unsecured loans. Besides, they are comparatively for a longer period.
Demat Account Statements are broadly classified as -
So, can any corporate raise money through fixed deposits?
No, certain guidelines direct which companies are eligible for running such schemes to raise capital. These guidelines are issued by Reserve Bank India (RBI) and under section 58A of The Companies Act (1956).
The corporate's money is utilized, and then periodically, the interest rate is issued to the individuals until the maturity date. Once the maturity date, the money is returned, and individuals can reinvest it as a Fixed Deposit under the same corporate or the other corporates and financial institutions.
Fixed Deposits in banks guarantee returns as they are not linked and influenced by the market. However, it is the same with the corporate FDs as they are also not influenced by market or interest rate fluctuations. If a company offers a certain interest rate, it is the same and not affected by the market or interest rates that vary.
Corporate FDs are the best in interest rates compared to banks. Considering a debt instrument where the investor needs higher returns, Corporate FDs can find the best fit. These are not influenced by the market performance and the fluctuations in the interest rate and provide much better returns than banks and other financial institutions.
Likewise to the banks, Corporate FDs also take care of the senior citizens. Here, senior citizens can find stability and attractive periodic money that can make life easier. Besides, the interest rates for senior citizens are higher than the banking schemes, which makes it a much more viable option when choosing to invest in FDs.
One of the major advantages of investing in corporate FDs is short-term investments. Bank FDs can be anywhere between a few months to a few years, but corporate FDs cannot exceed more than five years of timeframe, and this makes it a viable option when investors want high returns in a short duration of time.
Several corporates offer FDs, but which is the right company to invest the money as a Fixed Deposit? This is a common problem, and to solve this, investors can check the ratings of corporates given by CARE (Credit Analysis and Research Limited), CRISIL(Credit Rating Information Services of India Limited), or ICRA (Investment Information and Credit Rating Agency of India Limited) and then make a wise decision. These ratings are given to corporate after examining the company records, repayments, and interest rates which help potential investors by giving them a clear picture.
Company ratings are in the format AAA, AA, BBB, and more. AAA is the highest rating which signifies an investor can find a potential money hive after investing in such a company. This also gives a clear comparison with other companies, and investors can stop investing in a AA or BBB rating.
Nominee can be chosen by the investors when investing in corporate FDs, and this gives a greater advantage for investors. If the investor is holding a huge amount in the corporate Fixed Deposit and there is a sudden unfortunate demise of the investor, the nominee can take charge and possess all the money.
There is a higher return with the Corporate Fixed deposits compared to bank FDs, but there are a few notes that the investors should make before investing in Corporate FDs,
Several corporates offer Fixed Deposits but not all the corporates offer the same interest rate, they vary, and sometimes the marginal difference is too high. It is better to compare the corporates first before investing and check if they have better CARE, CRISIL, and ICRA ratings. AAA rating is considered to be the best.
One of the things that most investors do is only follow the rating system. Investors should check the company's track record with profit and loss-making history. If the loss is a one-time or exceptional case and the track record is much positive. It can stand as a great investment opportunity for corporate FDs. Besides, it is a good practice to know the company's plans and analyze if it will cause a positive or negative impact overall.
Most banks penalize the FD investors for premature withdrawals. This is usually around three months after investing. The situation is the same with Corporate FDs, and there is a penalty for premature withdrawal. It is best to know the penalty before investing.
It is safe to invest in corporate fixed deposits as they are less risky and are not influenced by market changes.
A company fixed deposit is the term deposit where the money is held for a tenure against interest-based returns.
Corporates are ranked or rated in terms of AAA, AA, BB, and these ratings are made based on the companies' previous financial records. Using these ratings, one can determine the best company for fixed deposits. AAA is the highest rating for a corporate.
If you want to invest in the company's fixed deposits, one way to buy is from the brokers. These are verified and take certain commissions while they help in buying the company's fixed deposit.
The tenure period of corporate fixed deposits ranges from months to years but cannot cross more than five years.
Final Words
Corporate FDs hold a great chance for those who wish for higher returns, and besides, it also diversifies the investment. They offer higher interest rates than bank FDs. They can be compared on an operational and rating basis, making it easier to choose a potential company for corporate FD.