Investing in Corporate Fixed Deposit

Corporate fixed deposits are getting popular as an investment option among investors having above average risk appetite. Persistent inflation round 7% is almost eating all the returns which are being generated from safer investment option like Bank fixed deposits (Your money is de growing in real sense). As corporate fixed deposits offer returns in the range of 10 to 15% they are better investment options in the current scenario. Even though Bank fixed deposits are safer, diversifying your portfolio using some good corporate fixed deposits will do more good than harm. Investing in companies having high management quality and sound business model will diversify away the risk of bankruptcy and fraud.

 Key Features of Corporate Fixed Deposit

1.     High Interest Rate on Fixed Deposits – The interest rate offered on the corporate deposits is in the range of 10 to 15% based on the tenure. Bank fixed deposits offer rates in the range of 8 to 10%.

2.     Secure – All the corporate fixed deposits are rated by various rating agency. They take proper care in analysing the business model and management capability prior to assigning rating to the offer. The rating provides a fair idea about the safety of investment corpus.

3.     Fast and convenient – Companies are fast in adapting to new environment and demands. Most of the transactions related to deposits can be executed in online environment. Renewal and interest payments (through ECS) happen online.

4.     Liquidity - Quite liquid as loan against Deposit and premature withdrawal option (mostly post 3 months) available

5.     Options of Cumulative and Non Cumulative deposits – You can ask for interest payment on half yearly basis or interest can be compounded on half yearly basis.

6.     Addition benefit for senior citizens – Interest rate available to senior citizens is approximately 25 bps higher than the normal rate.

Key Concerns

Corporate fixed deposits are less secure as compared to bank fixed deposits. Chances of fraud and company going bankrupt are high and in such a scenario investor can lose the whole corpus. RBI doesn’t secure (up to maximum of 1 lakh) these deposits as it does for bank deposits. Taxation is one concern which you cannot ignore as the interest income is taxable.

 Steps to choose the corporate fixed deposit for investment

1.     Assessing corporate house backing the deposit – Choosing a good brand name with long and credible history is of paramount importance.

2.     Study the Rating of the issue – Look for the rating assigned to the issue by rating agency. Read the full report before taking any decision. Report will give you a fair idea about the safety of your investment.

3.     Investigate the Rate of return – Do not be too greedy. Any return guaranty over and above 12% will be difficult to fulfil. If someone is offering return in the range of 15%, extra caution is warranted.

4.     Choosing the Investment Horizon – Be careful while deciding your investment horizon. Company going bust in long run is highly probable so investing for very long term is not advisable.

5.     Pre mature closure guidelines – Read the pre mature closure norms very carefully before investing as it varies from company to company. You might be penalised for premature closure which will eventually hurt your returns.

 Options Available

Listed below are the various options where you can plan to invest. These are good issues but you need to find the best among equals.