Fixed deposits have been a preferred medium of savings for many generations to this day. Like banks, the Reserve Bank of India (RBI) also permits some companies and non-banking finance companies (NBFCs) to accept deposits for a fixed term and interest rate. These deposits are known as corporate fixed deposits. Corporate fixed deposits (FDs) are a great investment option if you aim to invest for capital security and fixed predictable returns. You can get regular income by opting for a regular payout option or accumulate your corpus through the cumulative option.
Here is everything you should know about corporate fixed deposits:
What are corporate fixed deposits?
Corporate FDs are term deposits where you invest money for a fixed duration at a fixed interest rate. Corporate FDs are offered by NBFCs and a few corporates. Generally, corporate FDs function like regular fixed deposits, but the former offers a higher interest rate and more flexibility in interest payments. Corporate FDs can have a lock-in of a few months or a few years.
Why should you invest in corporate FDs?
If you are a low-risk investor and want to invest for capital preservation rather than growth, then you can consider investing in a corporate FD.
Here are some of the top benefits of investing in corporate FDs:
- Better interest rates: Corporate FDs fare better than regular bank FDs as they offer a significantly higher interest rate. The difference in interest rate between these two types of FDs ranges from 1% to 3% on average, which can have a seemingly sizable impact on your savings in the long term.
- Secure from market interest rate fluctuations: Bank FD interest rates depend on several factors like interest rate movement set by the RBI. However, corporate FDs interest rates are pre-determined and not subject to market rate fluctuations. You get assured and higher returns than bank FDs.
- Highly liquid: Corporate FDs qualify for loans. You can take a loan against your corporate FD up to 75% of the maturity amount. If you do not want to take a loan, you can opt for premature withdrawals by paying a nominal penalty.
- Flexible features and interest payments: Corporate FDs have lower lock-in periods and are more flexible in interest payments. Companies allow you to take periodic interest payments – monthly, quarterly, and annually. This helps you create a stable income stream. If you do not want periodic payments, you can access your accumulated corpus at the expiry of the FD tenure.
Who should invest in a corporate fixed deposit?
If you are a low-risk, short-term investor, you can consider saving your money in a corporate fixed deposit. However, these FDs are not covered by any deposit insurance, unlike bank FDs. To overcome this drawback, ensure to conduct in-depth research before choosing the company or the NBFC. Choose a company with sound fundamentals, strong financials, and a good credit rating. It is ideal to choose corporate FDs of companies that have a AAA or equivalent credit rating.