What are Corporate Fixed Deposits
Corporate fixed deposits are company schemes, both from manufacturing units and Non-Banking Financial Companies (NBFCs), which raise funds from the public. As opposed to bank FDs, which are secured by way of deposit insurance, corporate FDs are non-secured instruments and typically have higher interest rates as compensation for the extra risk involved.
They have fixed maturity terms ranging from a few months to several years, with interest paid periodically or at maturity. They bear a guaranteed rate of return and hence are popular with cautious investors seeking certain income.
Key Factors to Consider When Choosing a Corporate FD
Credit Ratings and Safety
Choosing the best company fixed deposit involves considering some key aspects in minute detail. Ratings from agencies such as CRISIL (Credit Rating Information Services of India Limited), CARE (Credit Analysis and Research Limited), and ICRA (Investment Information and Credit Rating Agency of India) give the details of a company’s ability to repay the funds.
Interest Rates and Tenure Options
Overall, the companies with better credit ratings are deemed to be safe but pay lower yields compared to the companies with poorer ratings, and lower-rated companies can pay more with greater risk. The most important thing to keep in mind here is the question of safety in any of your options.
Firms vary much in the latitude of action and the interest they need. Bear in mind that interest rates are usually the most glaring sign when interviewing a couple of firms of the same term length to come to the best choice, and of all terms, the longer one is against a higher rate of interest. But if things are reversed with this scenario, the rate still can fall, although it may not be the situation to begin with.
Liquidity and Premature Withdrawal Policies
Liquidity requirements are also to be given importance while choosing a corporate FD. Look for premature withdrawal conditions, including penalties and processing duration. Some companies allow partial withdrawal, while others do not provide this facility. Having emergency funds in hand spares you from breaking your FD prematurely and thus from suffering interest loss.
Company’s Financial Health
The financial stability of the company should be carefully examined before investing. Look at its books, history, market image, and business stability. A stable company with continuous profitability, sound debt levels, and good growth potential is a safer bet for investment. Those companies with poor financials could fail to make their repayment on time even when they are quoting good interest rates.
Opt for a Longer Lock-in Period to Get Higher Interest Rates
Corporate fixed deposits
Usually pay higher interest rates to investors who tie up their money for longer terms. The spread between short- and long-term deposit interest rates can be huge, usually varying between 0.5% and 2% or more. By going for longer tenures, not only do you get better rates, but you also insulate yourself from future interest rate changes in the market.
But balance your requirement for greater returns with your liquidity needs and goals. Think of laddering your investments by spreading your money over various periods of maturity in order to maximize returns while retaining some liquidity.
Tax Implications on Corporate Fixed Deposits
The interest earned out of corporate fixed deposits is taxable in full as per your income tax slab rate. The investments in these instruments do not have any tax exemptions as with some other types of investments. TDS (Tax Deducted at Source) must be deducted by companies at 10% if the interest paid is more than ₹5,000 in a financial year.
If you do not have a taxable income, you can file Form 15G (for non-senior citizens) or Form 15H (for senior citizens) to prevent TDS deduction. Keep in mind that even if TDS is not deducted, you are still required to report this interest income in your tax returns and pay taxes accordingly. You can consult a tax advisor to know the implications based on your individual financial situation.
Reinvesting the Interest Earned
Maximizing returns from corporate FDs is all about managing the interest earned strategically. A good method is to reinvest the interest payments so that you can leverage the power of compounding. When you invest in corporate FD with a cumulative option, the interest is added to the principal amount and earns further interest over time.
This can highly maximize your end returns against other options of interest payouts. For people in need of periodic income, invest a higher corpus and take only the needed payout, leaving the rest to grow. Having a reinvestment strategy aligned with your goal assists in maximizing returns without sacrificing needed cash flow.
Conclusion
Corporate fixed deposits are a reliable investment option for those seeking better returns than deposits in banks. In order to make the optimal decisions, diligently evaluate the trustworthiness of the company, interest rates, and withdrawal terms before investing money in corporate FD.
Remember that corporate FDs should be only a part of your overall, diversified investment portfolio. By balancing return and risk, considering tax implications, and reinvesting interest income strategically, you can maximize the payoff of these investment instruments. Always prioritize safety and align your investment choices with your financial goals and risk tolerance for long-term financial success.
