What are the Risks Involved while Investing in Corporate FDs?
Fixed deposits (FDs) offered by banks have been a popular investment option in India for decades. This is because they offer assured returns and entail minimal risks. However, as interest rates on bank deposits have decreased now, and corporates and non-banking financial companies (NBFCs) are offering higher rates, several investors are considering corporate deposits as an alternative investment option.
What are corporate deposits?
Corporate deposits are collected by companies and NBFCs from investors for a fixed duration and at a pre-determined rate of interest. Like bank deposits, corporate deposits offer a fixed interest, and you can choose from different tenures. Moreover, the rate of interest on corporate deposits is higher than the former, allowing you to earn attractive returns.
However, before you decide to invest in corporate deposits, here are three risks you should consider.
- Risk of default
Bank FDs are secured with the Deposit Insurance and Credit Guarantee Corporation (DICGC) insurance for an amount of up to INR 5 lakh. However, insurance coverage is not available when you invest in corporate FDs, which means there is a default risk if the issuing company is under financial distress. However, you can mitigate this risk by investing in corporate deposits that have a higher rating from credit agencies.
- Lower post-tax returns
Although the company FD rates are higher than those offered by bank FDs, the returns are added to your income. You need to pay tax on these returns as per your income tax, which can significantly reduce the actual rate of interest earned on company deposits.
- Premature withdrawal penalty
Most companies Fixed Deposit have a certain lock-in period, and you cannot withdraw your money during this time. Additionally, they do not allow partial withdrawals before the maturity date. If you need the money, you must take the entire amount, which means you will have to forego the interest for the balance tenure. Additionally, the issuing company may levy a premature withdrawal penalty, which can reduce the effective fixed deposit interest rate.
Often investors may be wary of investing in company deposits as these are not secured. However, NBFCs and companies that issue such FDs need to adhere to strict regulatory guidelines laid down by the Ministry of Company Affairs (MCA) and the Reserve Bank of India (RBI).
Well-known NBFCs like Mahindra Finance offer FDs at attractive interest rates. The company has an FAAA rating from Credit Rating Information Services of India Limited (CRISIL), which ensures maximum safety. So, check the fixed deposit eligibility norms on their website and invest in one today.