Corporate fixed deposits carry a higher rate of interest in comparison to bank fixed deposits. Returns are subject to risk and repayment/business behaviour of corporate is riskier than banks, thus higher rate of returns. You should never pick companies that give you a return of more than 3% higher than average return given to you by banks-those companies are very risky.
You must look at the rating that the fixed deposits have got. Non-banking financial institutions have been directed by RBI to have a minimum of ‘A’ rating before they can tap the markets. For other industries, there is no such mandate. You must avoid unrated fixed deposits at all costs and should prefer only above ‘A ‘rating out of the rated one.
Check the compounding of interest. Is it compounded annually, monthly or semi-annually? Please remember- more the frequency of compounding, higher the effective interest rate. Choose fixed deposits with monthly compounding or quarterly compounding rather than annual or semi-annual. Check what the payout is? Is the company paying interest monthly or quarterly or annually? In case you want regular income, go for fixed deposits that give you payouts monthly or quarterly. Cumulative fixed deposits return you interest at maturity, rather than at regular intervals. For corporate fixed deposits, you should prefer fixed deposits that return you money at regular intervals so that you are sure of getting your returns in hand.
Look at how interest payment comes to you. Does it come to you in cheques posted to your address or through direct bank transfers? In case it is direct, the hassles are lesser for you, especially if you are an out-station investor.
It is important to understand the business model of the company and where the company generates revenues from. Are these sources regular enough to service debt of the company? Study the financials and the annual report to find out the industry outlook and the broad financial ratios of the company. Evaluate the payback strength of the company in case regular inflow of revenues stop coming in at any time in future.
Check whether the fixed deposit is secured or not. Deposits secured under first and exclusive charge of the depositors are safe for investing.
Over and above all these, check how the company has been repaying in the past. That is a strong and clear indicator of the repayment ethics of the company.