What is a Corporate FD?
Corporate Fixed Deposits or a Company Fixed Deposits are offered by Non-Banking Financial Institutions (NBFC) and act as a savings product for the investors. The interest rates offered by these deposits are generally higher than the bank fixed deposits rates.
Investors can choose to invest in corporate or company fixed deposits if they are not looking to invest in any risky asset class. It is important to check the credit rating of these NBFC’s as provided by CRISIL, ICRA & CARE. Hence, you must invest in companies with adequate creditworthiness. This will help the investor to review the stability of the NBFC. Furthermore, the company fixed deposit is not covered by the DICGC like a regular fixed deposit, which should be considered by the investors.
Features of a Corporate FD
The features of the corporate fixed deposit are the following:
- Depending on the terms and conditions of the company, the fixed deposit can be liquidated easily.
- The credit rating of these companies can be checked through ratings provided by ICRA & CRISIL. This helps the investors to evaluate the risk that might be involved.
- These fixed deposits may offer premature withdrawals subject to certain conditions.
- It provides better interest rates than bank fixed deposits.
- There is no restriction on the usage of the deposit once it matures.
- In some cases, you can find the opportunity to choose the tenure of the investment along with the maturity date.
What are the benefits of investing in a Corporate FD?
The companies provide corporate fixed deposits and aim to provide a higher return than conventional fixed deposits. Below are a few benefits of investing in a corporate fixed deposit:
- Investors investing in a corporate fixed deposit enjoy a guaranteed return from the company. This means that no matter how the market is performing, the company needs to pay the promised interest to the investor.
- These deposits offer a higher rate of return to senior citizens. This allows them to earn a higher return than the non-senior citizen investors.
- It allows investors the flexibility to choose between the tenure as decided by the company. For example, if the company provides a range of 1-5 year duration, the investor can choose to select any period between this 1 & 5 year for their investment.
- In the case of a premature withdrawal, the NBFC’s charge a lower penalty than banks in the case of fixed deposits.
Who can invest in a Corporate FD?
Investors who are looking to invest for a short-term objective such as for an international trip. If the investors have a long-term horizon, it is better to invest in mutual funds as they offer better returns over a longer period.
It is very important to check the credit rating of the company issuing the fixed deposit backed by the fundamentals of the company. If the credit rating of the company is not good, investors should be very cautious and should consider putting their money in other trusted instruments. It is always ideal to invest in AAA or equivalent rated corporate deposits. This in turn ensures the safety of the principal and interest.
Documents Required to Invest in a Corporate FD
The investors need to submit the required documents along with the KYC details in order to open a corporate fixed deposit. The following is a list of such documents:
In case the applicant is an individual:
In case the applicant is a public or a private company:
- PAN card
- Certificate of incorporation
- Memorandum of association
- Board resolution affecting the opening of fixed deposit account
- KYC details of the authorized signatory
How to choose the Best Company Fixed Deposit?
You can consider the following factors for choosing the best company fixed deposit:
- Compare Interest Rate: Investors should avoid opting for fixed deposits where the interest rate is below 7%. It is important to choose between the various corporate fixed deposit and select the one offering the highest rate of interest.
- Check Credit Rating of the Issuer: Before proceeding with the investment, it is important to review the credit rating of the lender. For this purpose, the investors can refer to the credit rating awarded by agencies such as CRISIL or ICRA. This becomes an important factor as the companies with lower credit ratings are not investment attractive and run the risk of default.
- Choose the Preferred Type of Fixed Deposit: The corporate offers two categories of deposits offered – cumulative and non-cumulative fixed deposits. In the case of cumulative fixed deposits, the interest is compounded over the tenure of the investment and paid along with the maturity amount. In the case of non-cumulative deposits, investors can get earnings on a monthly, quarterly, semi-annual, or annual basis.
The investors who don’t need the money till the end of the tenure prefer cumulative fixed deposits. While the non-cumulative fixed deposit is ideal for someone who requires a regular payout, say a retired person.
- Simple Application Process: In today’s digitization world, it becomes inevitable to avoid the digital process which each and every organization follows. While some of the organizations have adopted this effectively, others are still struggling around the same. It is important to choose a corporate partner with which the investor feels comfortable. There are still some cases where the investor would have to visit the branch. This is more of a preference as there are still people who are more comfortable with the offline process.
Who should invest in a Corporate FD or a Company FD?
- Corporate fixed deposits provide a higher rate of return compared to a traditional fixed deposit but it is not suitable for investors who fall under the higher tax slab. Thus, if you are falling under a higher slab rate, debt funds may be a better option.
- If the investors have a short-term investment goal and do not wish to opt for riskier options, the corporate fixed deposits are a suitable option.
- Investors should invest only in those corporate fixed deposits which are rated “stable” by the credit rating agencies such as CRISIL & ICRA. This in turn reduces the risk undertaken by the investors. Furthermore, investors should do a thorough analysis of the company before investing.
What is the Process of pre-maturing the Corporate Fixed Deposit?
Corporate fixed deposits can be pre-mature depending on the corporate terms and conditions. The investor can do the same either online or offline. This requires the investors to provide the following information:
- Reason for pre-mature withdrawal
- A canceled cheque of the account where the investor intends to receive the amount.
- The original corporate fixed deposit receipt
Frequently Asked Questions
What are the tax implications of the interest earned on the fixed deposit?
The interest earned on a corporate fixed deposit is taxable at the slab rate applicable to the assessee provided the returns exceed Rs. 5000 in a year.
What are the different payment options of company fixed deposits?
The corporate fixed deposit allows the investor to invest in either a cumulative or a non-cumulative fixed deposit. The former allows the investors the option to get interest maturity along with the principal amount invested. In the latter case, interest can be paid on a monthly, quarterly, half-yearly, or annual basis.
What is the minimum tenure of a company fixed deposit?
While various companies have different tenure of the company fixed deposit, the minimum tenure will always be more than 12 months.
Is premature withdrawal allowed in the case of corporate fixed deposit?
In the case of corporate fixed deposits, premature withdrawal is allowed subject to certain conditions specified by the corporate. Furthermore, the corporate might levy a penalty for pre-maturing the deposit. Certain corporates also have a lock-in period of 3 months during which investors would not be able to liquidate their investments.
What is the difference between a bank fixed deposit and a corporate fixed deposit?
A bank fixed deposit is offered by a bank whereas corporate fixed deposits are offered by NBFC’s and companies. Corporate fixed deposit generally offers a better return than the traditional bank fixed deposits. However, the corporate fixed deposit is much risky and does not carry any deposit insurance coverage offered by DICGC
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