With the bank rates for saving accounts and Fixed deposits dropping down, people have started looking for other avenues to save money and get better returns. Corporate Fixed Deposits are comparatively riskier than bank Fixed deposits as default risk is high in these FDs. If you want to go in for for corporate FDs, it is advised to opt for those which have a higher credit rating. Worth mentioning here is that despite its higher interest rates, it is not suitable for all categories of investors as it comes with its part of risk. All corporate deposits are not worth investing either as you may lose your capital.
Here are five factors an investor should consider before investing in a corporate fixed deposit.
Corporate FDs are comparatively riskier than any bank FDs as default risk is high in these FDs. Wealth managers advise going for corporate FDs which has a higher credit rating, although there are chances of you having to sacrifice on return. Higher credit ratings of the FDs reflect better financial health of the company and a lesser chance of default.
You should choose for a company deposits only if the interest rate differential between the corporate FD and bank FD of similar tenure is at least 3-4%. Otherwise, it is not worth taking the additional risk of losing your investment.
According to market analysts, it is advisable to go for corporate FDs of shorter tenure of approximately 1-3 years. As higher the tenure, higher is the risk of default. The chances of the issuing company’s fortunes getting affected by adverse changes in the economy are higher in the longer term. Even for cyclical companies, a change in the business cycle may severely affect the repayment capacity of a company.
Companies having a high corporate governance standard should be opted for when going for investing in FDs corporates. It is also very important that once you invest in a corporate fixed deposit, you should keep track of the developments in the company, its earnings and its perception among stakeholders. If for any reason, the company goes bankrupt or under heavy loses, returning the money of fixed depositors won’t be the first priority for the corporate and you may lose your principal amount.
Corporate FDs are not tax exempted, so it is not at all advisable for senior citizens to go for corporate fixed deposits. The interest income from bank fixed deposits up to Rs 50,000 is tax-free. But the same interest from a corporate fixed deposit will be taxable for senior citizens.
Though the returns might be attractive and tempting, do a thorough research before investing your hard earned money.