The preferred form of investment in India have always been fixed deposits. They have become the one-stop solution from planning for a holiday to saving for retirement.
Now Fixed deposits aren’t apt for long-term purposes despite all the advantages. They can be a reasonable choice in such situations if the target is a short term or a goal that cannot wait as it comes with the assurance that the return is assured. You have a choice of corporate fixed deposits if you are nervous about low bank FD interest rates.
This write-up explains the Corporate FD, its resemblances, risks and the benefits with the bank FDs.
Corporate Fixed Deposit
Several firms and NBFCs offer fixed tenure deposits at a specified rate of interest called Corporate Fixed Deposit. They deliver assured returns, offer stability and flexible tenure options and have a higher rate of interest than bank FDs.
Similarities between Bank and Corporate FDs
Corporate fixed deposits promise a safe return
One of the main benefits is that corporate FD also ensures assured returns like the bank FDs. For instance, you have deposited ₹ 2 lakh in a Corporate FD at 05.35% annual interest. At the year’s end, you will earn ₹ 2.11 lakhs, regardless of how the stocks move or how the rate fluctuates.
Moreover, you know the precise balance you earn at maturity at the time of the investment. This is a massive benefit for you to raise confidence in your future financial goals.
Higher Senior citizen FD interest rate
Most corporate FDs give a marginally higher senior citizen FD interest rate, as most bank deposits. For instance, When a non-senior citizen receives 4% of a return for a fixed deposit, the same contribution typically results in a senior citizen getting higher than 4%.
This is an additional bonus for pensioners who are dependent on a guaranteed income deposit.
The term is generally between one and five years for a corporate fixed deposit. Your choice of the term within that span is adjustable. The interest rate varies as per the tenure, i.e. the longer the tenure, the higher the rates.
Benefits of corporate FDs over bank FDs
Higher Corporate FD interest rates than bank FDs
Corporate Fixed Deposits pay better returns than bank FDs. For instance, PNB offers interest rates from 3% to 5%, whereas the Bajaj FD provides returns up to 7.2 % annually.
Premature withdrawal is lower for corporate FDs
RBI has mandated a minimum penalty time of three months for all FDs. It means you will have to pay charges for premature withdrawal if done in the first three months. Corporate Fixed Deposits typically have a shorter penalty period than bank FDs.
Questions about the safety dimensions of Corporate fixed deposits
Are Corporate FDs risky?
Many people are worried that in case of solvency, their deposits may lose capital. It is necessary to remember that all NBFC entities who wish to raise deposits must comply with strict RBI/Ministry of Corporate Affairs (MCA) regulations and guidelines. Therefore, although over 10,000 NBFCs operate in India, only a few can accommodate public deposits. This means that the risk for borrowers in placing capital into fixed deposits is low.
Regulations and guidelines
Who can collect deposits?
RBI has made getting a valid licence mandatory. Merely being an NBFC is not adequate to collect deposits. At least ₹ 5,000 crores as the financial assets should be held by the company. Besides these NBFCs, specific other public deposit acceptance criteria must also be met. Additional regulations are:-
Minimum tenure should be between 1 and 5 years
NBFC can take FDs up to a limit, and it varies for various NBFCs
The regular and senior citizen FD interest rates cannot be more than the RBI rate, updated periodically.
Any related details shall be transmitted to RBI.
They cannot give the depositor any special rewards or gifts.
Minimum rating of credit for deposit collection
CRISIL and ICRA rate companies that collect deposits after looking at the company’s record, if the interest rates are transparent, etc. Businesses are given ratings like AAA, AA, BBB etc., based on how good they are on each criterion. AAA is the highest-ranking and demonstrates a sound balance sheet. To collect deposits, NBFCs/companies must have a minimum BBB ranking.
Conclusion: Bajaj and HDFC are two AAA companies for collecting FDs. And FD holders collected their returns on time, and the FD interest rate and payout plans were transparent. So, you must only invest in the FDs accredited by AAA to minimise the chance of default.
And if you have a target to accomplish in 1 to 5 years, a corporate FD is the right choice. It provides you with the security and return of a fixed-income instrument.