Fixed deposits (FDs) have been a popular investment instrument in India for earning fixed and guaranteed returns on savings. However, following the flat-lining interest rates on FDs and recent rate cuts by the Reserve Bank of India (RBI), many investors are now looking for a different investment option.
If you are looking for stable interest rates and are willing to bear moderate risk on your investment, then you can find a good alternative in Corporate Fixed Deposits (CFD). Here’s all you need to know about how corporate FDs function and the advantages and risks involved.
What are Corporate FDs?
Corporate FDs, a kind of fixed deposit, are issued by corporates and non-banking financial companies (NBFC). Here, these companies collect fixed deposits at a pre-defined rate of interest for specific tenures. almost like bank FDs, CFDs provide you with guaranteed returns and adaptability to select your tenure. Typically, these fixed deposits are rated for his or her credibility by rating agencies like CRISIL, ICRA, CARE, and more.
Salient features of corporate FDs
No Volatility in Returns
A significant advantage of investing in corporate FDs is that you simply receive returns that aren’t volatile within the least as in the case of equity. Say, you invest Rs. 1 lakh during a corporate FD and therefore the concerned institution promises an annual rate of interest of seven . regardless of whether the market soars or declines over the tenure of the CFD, you receive Rs. 1.07 lakhs on maturity.
Since you’re aware about the precise amount you’ll receive on maturity, at the time of investment, you’ll navigate your financial decisions smartly.
Higher interest rates for senior citizens
Senior citizens typically enjoy higher interest rates compared on CFD schemes. Furthermore, various corporate FDs allow you to settle on your interest payment schedule – monthly, quarterly, half-yearly, or yearly intervals. If you’re receiving a pension, these FDs can supplement your monthly income.
Just like bank FDs, the interest on your corporate FD is taxable counting on your slab rate. ranging from the fiscal year (FY) 2020-21, if your interest income exceeds Rs. 5,000, you’ve got to pay a tax write-off at Source (TDS) amount at 10% on your corporate FD.
Some investors are sceptical of investing in CFDs thanks to the misunderstanding that these instruments are riskier, and that they may lose money if the corporate defaults or faces bankruptcy. However, all financial institutions collecting deposits adhere strictly to regulations from the Ministry of Corporate Affairs (MCA) and therefore the RBI. Hence only a couple of NBFCs are eligible for accepting corporate FDs, and these measures make sure that the danger for investors remains negligible.
Before investing during a corporate FD, you want to check the credit rating of the corporate to know its ability to fulfil financial obligations. In India, credit rating agencies like ICRA and CRISIL analyse and assess the company’s performance and history of adhering to MCA and RBI regulations. counting on the evaluation, companies are assigned ratings, from BBB, AA, to AAA. a minimum of a rating of BBB is required for a corporation to gather deposits from investors.
It is advisable to take a position in AAA-rated companies.
Pre-closure of deposits
Typically corporate FDs don’t allow pre-closure within six months from the date of investment. If you select to withdraw the investment before maturity, a penalty could also be levied.