EXECUTIVE SUMMARY: Although Corporate FD’s are not new in the market, there are many investors who don’t know about this product and risk associated with it. In this article we have explained how to select Corporate FD based on various factors, its ratings, tax treatment and some words of caution for investors.
What are Corporate Fixed Deposits ?
Corporate FD’s are offered by the financial institution or NBFCs (Non- Banking Finance Companies) that earns a fixed rate of return over a period of time. The returns are usually higher than those of Bank FD's and therefore these are considered a bit risky as well. Generally, interest rate which is offered lies in the range of 8%-15%. These are in the form of unsecured loan which company uses for working capital requirement or for expansion purpose; hence the investors cannot sell it easily or transfer the ownership to recover the invested amount as these are not liquid in nature. Also in case if company is getting default or is winding up the business the FD investors will get the amount in last.
What to look out for before investing? Before investing in a Company deposit scheme, one has to look at the company’s pedigree and profile. One needs to know why the company is accepting deposits from the public. If there is not enough time to do the homework of company’s profile then credit ratings are the best options for referring to a company’s FD scheme. It is important here to note that if the rating is good, then that scheme may offer lower interest rates and vice versa. Therefore higher the ratings lower the returns. The interest in Company FD's does not fluctuate. They offer investors the option of receiving interest either on regular intervals or during the maturity period. The interest is compounded monthly or quarterly. Normally the tenure of Company FD's can range from 6 months to 10 years.
Sometimes these FD’s also have a lock-in period of 3-6 months, where heavy penalty charges are levied on premature withdrawals. These details are always provided on the application forms of the scheme.
Are these FD’s rated by some agencies?
The credit rating agencies like ICRA (Investment Information and Credit Rating Agency of India Limited), CRISIL (Credit rating and Information Services of India Limited), CARE (Credit Analysis and Research) are the ones that rate the companies and their FDs. If a Company FD has a rating of AAA, it means that it is safe and secure investment. Trading should be done in caution if the rating is lower as there could be numerous risks involved.
Some of the examples of credit ratings are below:
- CRISIL AAA - Instruments with this rating are considered to have highest degree of safety and timely servicing of financial obligations. These generally have the lowest credit risk.
- CRISIL AA - Instruments with this rating are considered to have high degree of safety and timely servicing of financial obligations. These generally have a low credit risk.
- CRISIL B - These instruments have high risk of default regarding timely service of financial obligations.
- CRISIL C - Instruments here have a high risk of default regarding timely servicing of financial obligations.
- CRISIL D - Instruments here are in default or are expected to be in default soon
Some of the top rated FD schemes are:
NHB Sunidhi Term Deposit Scheme: National Housing Bank is owned by RBI and provide financial support to different housing boards. CRISIL has given the rating of FAAA which indicates highest safety regarding timely payment of interest and principal is strong. Interest rates are 7.25% per annum for 12 months deposit.
Mahindra Finance FD scheme - Mahindra Finance is part of Mahindra and Mahindra Limited. This NBFC mainly focuses on financing in urban sector. This is rated as FAAA indicating the safety of interest and principal amount. The interest rate ranges between 8%- 8.25% per annum.
There are other schemes like PNB HFL (Punjab National Bank Housing Finance Limited), DHFL (Deewan Housing Finance Limited), LIC Housing Finance, Shriram Transport Finance, HDFC. These companies are having top ratings and offer interest rate between 7.50% - 8.85% per annum over different period.
Tax treatment – One also needs to be aware regarding the deduction of TDS (Tax deducted at source). In case of Corporate FD’s, TDS is deducted if one’s interest income crosses the threshold of Rs. 5000, but in case of Bank FD TDS is deducted after the interest income crosses Rs. 10,000. So while investing keep this rule in mind.
Word of caution for investors –
- Do not fall for the high interest rates; instead look out for those options which have high ratings.
- All famous business houses in industry are issuer of these types of FD’s, don’t go by name as few have defaulted in the recent past.
- Credit rating agencies regularly monitor and update the ratings, so keep check on your instrument’s rating, if rating falls then it is an indicator to move out as soon as possible.
- Do not put all eggs in one basket, this means do not invest all the amount in single FD, if you wish to invest then you can always split the amount between Bank FD’s and Corporate FD’s
- To be on a safer side, invest in corporate FD’s for short period less than 1 year.
Thus, the most attractive part of Company FD is just the higher interest rates that are offered but without any security. Investment in these instruments marks a question to the security of one’s hard earned savings. So will you choose this product to invest your money? Share your views with us.