How Do Corporate Fixed Deposits Work For Investors?
Ankita traveled to Russia last month on a pleasure trip. When all her friends asked her to try skydiving, she refused. It was not about money; she found skydiving dangerous. Her risk-avoiding nature is quite the same when it comes to personal financial planning.
Once her salary is credited, she deposits a fixed sum in the bank (fixed deposits). She is happy with the risk-free return and does not want to explore equity-based investments. At the beginning of January 2025, her friend suggested she go for a Corporate Fixed Deposit rather than a conventional FD for higher returns. Ankita was intrigued by the idea of higher interest without taking too much risk. She wanted to know more about how corporate fixed deposits work for investors.
There are so many investors with low-risk tolerance who wish to explore different alternatives without being exposed to market volatility. For such investors, corporate fixed deposits can be an excellent investment option, especially when the investment tenure is long.
Primarily issued by companies, these deposits allow firms to raise funds directly from investors, often providing competitive interest rates that translate into potentially higher returns. Even though the risk assumed by investors is greater than that of conventional bank FDs, these are still safer investments compared to any market-based investment. Further, the additional risk is balanced by the higher return offered by corporate fixed deposits.
Working Of Corporate Fixed Deposit
Corporate Fixed Deposits allow investors to deposit a set amount with a company for a given period at a predetermined rate of interest. At the end of the deposit term, the investor receives the principal amount along with the accrued interest.
However, unlike banks where your deposits are covered by deposit insurance, repayments and interest payments depend heavily on the company's financial health. It is also important to evaluate the financial performance and creditworthiness of the company.
Key Offerings From Corporate Fixed Deposits
Here is what an investor typically receives from investing in a corporate fixed deposit:
Offering | Description |
Regular Income | Corporate FDs guarantee regular income in the form of fixed returns at a higher interest rate than most traditional savings options. This predetermined rate ensures investors know how much they will earn, providing a stable income stream over the investment period. Corporate FD interest rates are usually 150-200 basis points more than conventional FD returns. |
Flexibility | These deposits offer flexibility in terms of investment duration and amount. Investors can choose short-term or long-term deposits based on their financial goals and decide how much to invest, with some companies offering deposits starting at relatively low amounts. |
Liquidity | While corporate FDs are generally fixed, some offer premature withdrawal options. However, this might come with a penalty that varies from one company to another. This feature benefits investors who might need access to their funds unexpectedly. |
Loan Facilities | Investors can often avail themselves of loans against their FDs up to a certain percentage of their deposit value. This can be a quick source of funds without breaking the deposit, although interest rates on such loans might be higher than regular loans. |
Wealth Building | With higher interest rates than bank FDs, corporate FDs can be an effective tool for wealth building. Over time, compounding these higher rates can significantly increase an investor's total returns, contributing to greater financial growth. |
Attractive Investment Options for Senior Citizens
| Many companies offer an additional interest rate to senior citizens, making corporate FDs a lucrative option for retirees seeking safe investment options in India. This bonus rate helps in enhancing the financial security of the elderly. |
Tax Implications on Fixed Deposits and Corporate FDs | Interest earned from corporate FDs is taxable under the Income Tax Act, which must be declared under the head of ‘Income from Other Sources.’ The tax rate depends on the investor’s tax bracket. The TDS rate is 10% on corporate FD. |
To invest in high yield corporate fixed deposits offered by leading NBFCs of India, simply click on the link below and register on Grip Invest. These corporate FDs on Grip offer interest rates of up to 9.41%.
Who Should Invest In Corporate FDs?
Anyone can invest in Corporate FDs as they are excellent tools for diversifying portfolios. For investors who can tolerate low to moderate risk in exchange for a higher ROI compared to bank FDs, this is an ideal investment in a moderate to long-term period. Some corporate houses offer a slightly higher rate for senior citizens. Hence, for such investors, this can be an excellent option for generating risk-free passive income.
Return On Investment In Corporate FDs
As the risk assumed in Corporate FDs is comparatively higher than conventional fixed deposits, the overall return is also greater. Returning to the original example, Ankita has saved six months of salary and now wishes to invest in a fixed deposit. Here is how the expected returns should be in the case of a conventional vs. corporate fixed deposit:
Particulars | Corporate FD (in INR) | Bank FD (in INR) |
Principal | 6,00,000 | 6,00,000 |
ROI | 8.80% | 6.90% |
Period | 5 Years | 5 Years |
Type | Cumulative | Cumulative |
Interest Reinvestment | Annual | Annual |
Amount at Maturity | 9,14,736 | 8,37,606 |
Additional Interest | 77,130 | - |
Important Considerations Before Investing In Corporate FDs
Even though investment in corporate fixed deposit appears to be financially rewarding, there are a few risks of corporate fixed deposits that an investor should consider before making the decision:
- It is important to check the credit rating of the company before investing. You should be looking for ratings by agencies like CRISIL or ICRA that provide insight into the financial health of the issuing company.
- It is always advisable to conduct independent research on the issuer company’s market reputation and financial stability. Established companies with a long-standing record of fulfilling their financial obligations are generally safer.
- High-return investment options can transform into higher risk, which might not be acceptable for investors with low-risk tolerance.
- There can be premature withdrawal penalties, which can affect overall returns.
- Even if you have low-risk tolerance, avoid putting all your investment corpus in Corporate FDs as it can lead to unnecessarily higher portfolio risk.
- Any interest earned on these investments is subjected to income tax as per your slab rate.
How To Invest In Corporate FDs?
Here is an infographic suggesting how you can invest in Corporate FDs:
Conclusion
Corporate fixed deposits are an excellent investment option for investors seeking higher returns while taking marginally higher risks. They can significantly enhance an investor's portfolio with their fixed returns, flexibility, and additional perks like loan facilities and higher rates for senior citizens.
To further maximize returns, consider reinvesting the interest amounts. This strategy leverages the power of compounding, allowing your earnings to generate more over time. Additionally, using a Callable FD option can offer quick access to your invested funds without compromising on the potential growth of your deposit.
However, investors should understand that these are not government-backed or guaranteed deposits. You must research and do due diligence on the issuer company before making the deposit. To learn more about investment strategies and fixed income opportunities, sign - up on Grip Invest today.
Frequently Asked Questions On Corporate Fixed Deposits
1. What documents are required to invest in corporate fixed deposits?
To invest in corporate fixed deposits, documents typically required include identity proof (like a PAN card), address proof, and a canceled cheque for bank account details. There are numerous platforms that provide digital client KYC processes. You can invest in a corporate fixed deposit on Grip Invest after completing a quick KYC process.
2. What is the difference between cumulative and non-cumulative interest payouts?
The difference between cumulative and non-cumulative interest payouts is that cumulative interest is compounded and paid at maturity. In contrast, non-cumulative interest is paid at regular intervals, such as monthly, quarterly, or yearly.
3. Are the interest earnings from corporate fixed deposits taxable?
Yes, the interest earnings from corporate fixed deposits are taxable under the Income Tax Act and must be declared as ‘Income from Other Sources.’
4. What is the minimum amount required to invest in corporate fixed deposits?
The minimum amount required to invest in corporate fixed deposits varies by company but generally starts from a low threshold, making it accessible to a wide range of investors. You can start investing in corporate fixed deposits on Grip with an amount as low as INR 1,000.
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