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Bank FDs Vs Corporate FDs: A Comparison In Terms Of Returns And Risk
In India, the most favoured category of investment has always been fixed deposits. Fixed deposits are now not the best match for long-term plans, amid all the favouritism. But in such situations, if the purpose is for a short term or a purpose that can't be delayed FDs can be a reasonable consideration. And it is obviously because the assurance of a guaranteed return lies with it. That being said, you have an option of corporate fixed deposits if you are concerned about dropping interest rates of bank fixed deposits. We will touch about what a company FD is, its comparisons with bank FDs and its benefits in this article. And also discuss the risks associated with corporate FDs as well.
Meaning of corporate FDs in short
Like banks, some corporations and NBFCs are also authorised at a specified interest rate to attract deposits for a fixed term. Company Fixed Deposits are considered such deposits. They come with the promise of assured returns and the freedom to select tenure, close to banks. And, a higher interest rate than bank FDs is provided by corporate FDs as well.
Guaranteed return
Like bank fixed deposits, one of the greatest benefits of investing in corporate fixed deposits is that they also offer the security of an assured return. Assuming you have deposited Rs 1 lakh in a corporate fixed deposit, and you are promised by an NBFC/corporate concerned for instance Shriram Transport Finance, with a higher interest rate of up to 8.09 per cent per year currently. Then you'll get Rs 108,900 as promised after the maturity period. Considering this surety, you can know the exact interest income you will get after the maturity period. This is a big benefit that enables you to make your future financial planning more effectively.
Additional benefits for senior citizens
Corporate Fixed Deposits also provide a marginally higher interest rate for senior citizens, like most bank deposits. A senior citizen will usually get an additional interest rate of 0.25 per cent to 0.50 per cent. This is an added benefit for senior citizens who are retired and rely on fixed deposit returns for their wealth management.
Flexible tenure
Generally, the maturity period of a corporate fixed deposit varies from one to five years. This implies that you have the freedom to pick any period within the span. The interest rate will, therefore, fluctuate, i.e. the higher the tenure, the higher the returns.
Interest rates
Corporate fixed deposits provide interest rates higher than the fixed deposits of banks. SBI, India's largest commercial bank, for example, currently pays interest rates of 4.90 per cent to 5.40 per cent for fixed deposits of different periods between one to 5 years and up to 10 years. Meanwhile, for similar durations, the Fixed Deposit by Shriram Transport Finance FD, which is AAA rated by CRISIL, can provide you 7.25 per cent up to 8.09 per cent annually.
Penalty period
All Fixed Deposits need to have a minimum penalty duration of 3 months as per RBI guidelines. That seems to be, you'll have to pay a penalty for premature withdrawal if you withdraw the money within the first three months. Furthermore, it is up to the bank/NBFC/company to determine how long the penalty duration would last. The penalty period is generally shorter for corporate FDs than for bank FDs. For instance, in the case of SBI for premature withdrawal from SBI FDs up to Rs 5 lakh, customers are required to pay a penalty of 0.50 per cent across all maturity periods and the bank has set the penalty at 1 per cent for all tenures for premature withdrawal from SBI fixed deposits above Rs 5 lakh but below Rs 1 crore.
Risk
When it comes to opting corporate FDs, investors are worried that if the company collapses, since these investments are unsecured, they might lose a lot of money. It is worthwhile to highlight here that all NBFC/companies that wish to support deposits have to comply with the RBI/Ministry of Corporate Affairs' specific regulations and guidelines. Companies provide higher returns if compared to FDs of banks. However, the DICGC does not cover company FDs with deposit insurance, hence it is only for bank FDs up to a cover of Rs 5 lakh. This is now a topic of significance. Yet you must first verify the credit fitness of the respective company/corporate to tackle it.
Our take
CRISIL and ICRA are the rating agencies that provide ratings to companies. These agencies glance at the corporation's track history, whether the interest rate and payout timelines are disclosed to customers while the deposits are received, and so on. Based on how good they are on each standard, ratings such as AAA, AA, BBB, and so on are granted to the corporations. The best ranking is AAA which reveals that the company has a good capital structure. To receive deposits from the public, the NBFC/companies have to hold a minimum BBB mark. For instance, Shriram Transport Finance holds a rating of AAA by CRISIL and MAA+ by ICRA. Well, if you have a purpose that needs to be reached within 1 to 5 years, go for corporate FDs classified as AAA. Not only does it mitigate the risk of loss, but it also offers you with fixed-income investment security with better yield.
