Fixed deposits offered by public or private sector companies is known as corporate FDs. It attracts many investors as it provides higher interest rates as compared to normal FD. It is not backed by any collateral and therefore, is unsafe. People only rely on the reputation and credit score of the company when investing. The interest varies from company to company. But high rewards are accompanied with high risks.
Five Essential Features Of Corporate Fixed Deposits
1. Rating Of The Company
Based on the quality of funds and net worth of the company, ratings are given to different types of corporate schemes. You can choose according to the grade of the company. Higher credit rating leads to fewer risks in investment.
2. Interest Rates
As compared to standard fixed deposits, corporate fixed deposit provides the best FD rates. FD interest rates vary from 6.5% to 8.5%, whereas corporate fixed deposit rates range from 9% to 12.5%. These interest rates are regulated by RBI, which varies according to time.
3. Types Of Corporate FD
Corporate fixed deposit is generally divided into two schemes:
a) Cumulative Scheme: Under this scheme, interest is payable at the time of maturity along with the principal.
b) Non-cumulative Scheme: Under this scheme, earned amount is given regularly, which can be yearly or half-yearly depending on the company.
The duration period of the company FD depends on the firm regulated by RBI. Its tenure is very less as compared to standard fixed deposits. It can vary from 1 year to 5 years, depending on the rating and performance of the firm.
5. Premature Withdrawal Of Money
These have a lock-in period of 3 months. However, the removal of the amount depends on the companies policies. An investor may also have to pay some penalties depending on corporate terms and conditions.
Pros and cons of Corporate fixed deposits
Benefits of corporate fixed deposits are listed below:
- It provides higher interest rates as compared to standard fixed deposits.
- You can withdraw an amount according to your needs, like monthly, quarterly, yearly.
- Most of the corporate fixed deposits are rated by credit rating companies. The investor can invest according to these ratings for higher returns.
Drawbacks of corporate fixed deposits are listed below:
- Unlike standard fixed deposits, they have a high risk of default. So if you want to invest in a corporate FD, always look into the company’s rating.
- The interest earned from these FD’s is fully taxable.
Corporate fixed deposit provide higher interest rates as compared to standard FDs. You should invest in corporate FDs only if they have a credit rating. One should put their amount in different firms rather than investing all in one FD. You should keep track of the rating of a firm; if it drops, take out your money. Risks associated with these FDs are high; thus, one should be careful before investing in any of these schemes.