What Are Corporate FDs And How Different Are They From Bank FDs In 2023

Mar 12th 2024
Fixed Deposit
What Are Corporate FDs And How Different Are They From Bank FDs In 2023

What Are Corporate FDs? How Different Are They From Bank FDs? Fixed Deposits have always been a favorable investment option among investors who look forward to consistent returns over a period. Many folks relate fixed deposits closely with banks deposits as they usually find this investment tool there. However, there is another better option that is often overlooked by investors – Corporate FDs. According to investment experts, corporate fixed deposits tend to carry higher interest rates compared to the banks. However, it is to note the they are not supposed by any guarantee or collateral. Hence, they are considered unsecured.

In a typical fixed deposit, a person invests the money in a FD through a bank which accrues interested over the defined period and get the final amount once the FD gets matured. Now, like banks, a few other entities like NBFCs, corporates, and other financial institutions are permitted to raise funds for their existing and upcoming activities. Such types of fixed deposits are considered CORPROATE FIXED DEPOSITS (CORPORATE FDs).

What Are Corporate Fixed Deposits?

In corporate FDs, businesses obtain funds from the general public in the form of fixed deposits for a particular period of time. The invested amount is then used for various chores for a fixed time period whereas the investor is promised to get a particular interest rate by the corporate. This is an easy way for corporates to raise money for a number of things. Though corporate FDs provide better interest rates than typical FDs, they are unsecured. Being considered as unsecured loans, fixed deposits emerge as an easier way for businesses get cash for their different types of commercial needs.

Corporate FD vs Bank FD

Fixed Deposits (FDs) refer to saving accounts that provide better interest rates than typical savings accounts. It is a kind of term deposit where people invest a specific amount at monthly intervals to earn interest over the same. The amount can be withdrawn at the time of maturity.  There is no obligation on the investor’s side to make timely monetary contributions to fixed deposits as they are one-time investments.

Corporate FDs and Bank FDs

In order to understand both types of fixed deposits in India, it is necessary to understand the similarities and differences between them. Let’s get to know them below.

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Similarities

Assured Returns

The first and foremost advantage of corporate and bank fixed deposits is the guaranteed return to the investors. Irrespective of the market direction, either positive or negative, the corporate FD rates tend to be fixed and guaranteed. The investors can choose to get the return that was guaranteed to you by the bank or authority at the maturity of your FD's term.

Flexible Tenure

A person may choose the period of your investment in the care of corporate fixed deposits. Corporate FDs usually come with a tenure of one to five years as a short-term investment. This enables investors to pick an appropriate tenure to achieve their financial goals.

Better Interest Rate For Senior Citizens

Similar to bank fixed deposits, a majority of corporate fixed deposits allow elderly citizens to get better corporate FD rates. For elderly people whose income is dependent on sources other than their fixed deposits, this is of immense benefits.

Differences

Higher interest rates

The most salient feature of corporate FD is its interest rate that is greater than those on bank FDs.

Choice of withdrawal

Most corporate fixed deposits offer both cumulative and non-cumulative interest-based distributions which is quite beneficial for investors. The cumulative interest payment includes reinvestment of your interest earnings passing through a compounding algorithm. The strength of compounding ultimately leads to bigger payments as a result of this.

Lower penalty tenure on premature withdrawal

Corporate fixed deposits usually come with a penalty period of just 3 months which is found to be the lowest penalty period as per the Reserve Bank of India's (RBI) standards. This is in contrast to bank FDs, where the penalty period is as long as the maturity.

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Curtailed tenure

Contrary to bank FDs, which may have longer terms in years, corporate FDs have a maximum tenure of only five years. As a result, they are an excellent short-term investment decision.

Safety rating

All corporate FDs and eligible NBFCs receive safety ratings from top credit rating companies like CRISIL, CARE, and ICRA. Investors can stay confident when it comes to dependability and legitimacy of corporate FDs.

Risk Attached with Corporate FDs

Corporate FDs are considered products with low security which means that investors are at the risk of losing their money in the case of default. In order to safeguard the investment of investors, the RBI and the Ministry of Corporate Affairs have put in place stringent rules and standards for NBFCs. Investor funds can only be accepted as corporate fixed deposits by NBFCs that are in compliance with the regulations.

FAQs

1. What Documents Are Required To Open A Corporate FD?

To apply for a Corporate FD, the person must have a current, legally recognised identity and address evidence, such as an Aadhaar card, passport, or voter identification.

2. What Considerations Should A Person Make While Selecting A Corporate Fixed Deposit?

Before choosing a particular corporate FD, it is essential to consider the credit rating of the company providing the FD. A higher credit rating might signify lower risk.

3. What  Are The Several Ways That Company FDs Can Pay Their Interest?

Cumulative and non-cumulative interest payments are the two available alternatives. If you go with the first option, the returns will be invested and will be payable only after the investment reaches maturity. If you prefer the non-cumulative option, interest payments will be done to the investor  on a regular basis.

The Conclusion

As there are different types of fixed deposits available to investors, choosing a particular one is entirely up to you because every tool has its own kinds has advantages and disadvantages. However, it is recommended to choose an option that matches perfectly to your investment needs and budget. A corporate fixed deposit the best option for you if you are looking forward to highest FD rates choose with Investkraft. However, choosing a standard bank FD is advised if the security of your money is your concern. Therefore, it is up to you to choose a fixed deposit plan that suits your preferences.

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