The Basics of Corporate Fixed Deposits
The world of investment banking is tough to wade through if you are not knowledgeable about your options and resulting choices. Take the simple (or not so simple) matter of a Fixed Deposit (FD). Almost everyone is aware of what a basic Bank FD is, but many are unaware of what a Corporate or Company Fixed Deposit is.
Well, it's our job to keep you well informed, so your choices are born of sound advice. The purpose of this article is to arm you with knowledge about Corporate FDs and how they can be a useful investment.
What is a Corporate or Company FD?
A Corporate FD is a deposit invested in a company for a fixed period of time. Over this time your deposit earns a prescribed rate of interest. Both, Financial Institutions and Non-Banking Finance Companies (NBFCs), accept such deposits. Corporate FDs usually give you higher returns that Bank FDs, but they are unsecured and could be considered a bit of a risky investment. However, this risk can be avoided if you choose a company with a high credit rating.
How does it work?
Companies usually invite FDs when they want to raise capital for the company. The money deposited by investors is typically used to fund an expansion or a new company activity that requires immediate cash. It could also be used for daily expenses when the company experiences a serious cash crunch.
In return for this deposit, the company pays the investor a high interest payment on an ongoing basis i.e. the payments can be made on a monthly, quarterly or annual basis. It depends on the investor's choice. In a sense these deposits are like a loan taken by a company. At the end of the deposit tenure decided by the investor and the company, the company pays back the deposit made by the investor.
In the previous answer, we called this an 'unsecured' deposit. What this means is that if the company does not fare well and starts making losses, the interest payments may not happen as fixed and in the worst case scenario the entire deposit amount could be lost. This is a risk an investor must be willing take with regards to Corporate FDs.
What are the benefits of a Corporate FD?
Just because there's some amount of risk involved in a Corporate FD, doesn't mean it's not a good investment option. Assuming that the company is high on the credit rating, there are several benefits of investing in a Corporate FD.
- The interest rate is higher than regular Bank FDs.
- It is a short-term deposit with a lock-in period of 6 months.
- There is a fixed and safe Return on Investment.
- Income Tax is not deducted at source if the income from one company is not above Rs. 5,000/-
- To ensure that interest from one company does not exceed Rs. 5,000/- investments can be spread across various companies.
Should you invest in a Corporate FD? Is an unsecured deposit a bad idea?
Both are important questions, as Corporate FDs may come across as risky investments. Though it is good to be cautious, it's not a bad idea to invest in a Corporate FD. Sometimes companies invite deposits because it's cheaper than taking a bank loan. If the company is managed by a competent set of people, your returns on the investment will definitely be good. Just ensure that your do some good research before investing or ask a seasoned and trustworthy advisor to help you make the investment.