Corporate Fixed Deposits: Are They a Safe Bet for Companies?

Corporate fixed deposits (FDs) have gained traction among investors seeking higher returns compared to traditional bank fixed deposits. These investment products, offered by non-banking financial companies (NBFCs) and corporates, present a compelling proposition with attractive interest rates. However, the safety of these investments is a matter of significant consideration. This article delves into the intricacies of corporate fixed deposits, evaluating their safety, benefits, and associated risks. Furthermore, we will explore how fixed deposit apps facilitate investment and discuss the FD tax

Understanding Corporate Fixed Deposits

Corporate fixed deposits are time-bound investment instruments offered by companies to raise capital from the public. Unlike bank FDs, which are backed by the deposit insurance scheme, corporate FDs come with a higher risk due to their unsecured nature. These deposits usually offer higher interest rates as a premium for the increased risk.

Investors in corporate FDs must scrutinise the issuing company’s financial health and credit rating before investing. High credit ratings by agencies such as CRISIL or ICRA indicate a lower risk of default, making the investment relatively safer.

Benefits of Corporate Fixed Deposits

1. Higher Returns: One of the primary attractions of corporate FDs is the higher interest rates offered compared to bank FDs. This can significantly boost the returns on investment, especially in a low-interest-rate environment.
2. Fixed Income: Corporate FDs provide a steady income stream through regular interest payouts, which can be monthly, quarterly, or annual.
3. Diverse Options: Companies across various sectors offer corporate FDs, giving investors the flexibility to diversify their portfolios.
4. Easy Liquidity: While corporate FDs are time-bound, many companies offer premature withdrawal options, albeit with a penalty, providing a degree of liquidity.

Risks Involved in Corporate Fixed Deposits

1. Credit Risk: The primary risk associated with corporate FDs is the credit risk, which is the risk of the issuing company defaulting on interest or principal repayment. This risk is higher compared to bank FDs due to the lack of insurance and the unsecured nature of these deposits.
2. Liquidity Risk: Although some corporate FDs allow premature withdrawal, this often comes with penalties and may not be as liquid as other investment options.
3. Interest Rate Risk: Changes in market interest rates can impact the attractiveness of existing fixed deposits. If market rates rise, newer investments may offer better returns, making existing FDs less appealing.
4. Regulatory Risk: Corporate FDs are subject to regulatory changes, which can affect their terms and returns.

Evaluating the Safety of Corporate Fixed Deposits

The safety of corporate FDs hinges on several factors:

1. Credit Ratings: High credit ratings from reputable agencies are a strong indicator of the issuing company’s financial stability. Investors should prioritise companies with high ratings to mitigate credit risk.
2. Financial Health of the Issuer: Analyzing the company’s balance sheet, profit and loss statements, and cash flow can provide insights into its ability to honour its commitments.
3. Reputation and Track Record: Companies with a strong market reputation and a history of timely payments are generally safer bets.
4. Regulatory Compliance: Ensuring the company complies with all regulatory requirements adds an extra layer of security to the investment.

Fixed Deposit Apps: Simplifying Investments

The advent of technology has revolutionised the way investments are made, and fixed deposit apps are at the forefront of this transformation. These apps offer a seamless platform for investors to explore, compare, and invest in various fixed deposits, including corporate FDs.

Key Features of Fixed Deposit Apps:

1. User-Friendly Interface: Fixed deposit apps are designed to be intuitive, making it easy for users to navigate and invest with minimal hassle.
2. Comparative Analysis: These apps provide tools to compare different FD options based on interest rates, tenure, and issuer ratings, helping investors make informed decisions.
3. Paperless Process: The entire investment process can be completed digitally, from account opening to FD creation, eliminating the need for physical paperwork.
4. Real-Time Updates: Investors receive real-time updates on interest payouts, maturity dates, and other important information, ensuring they stay informed about their investments.
5. Security: Fixed deposit apps employ robust security measures, including encryption and two-factor authentication, to protect user data and transactions.

Tax Implications of Fixed Deposits

Fixed deposits, including corporate FDs, are subject to taxation under Indian law. Here are the key tax considerations:

1. Interest Income Tax: The interest earned on fixed deposits is taxable under the head ‘Income from Other Sources.’ The FD tax rate applicable depends on the investor’s income tax slab.
2. Tax Deducted at Source (TDS): If the interest income from FDs exceeds Rs. 40,000 in a financial year (Rs. 50,000 for senior citizens), the bank or corporate deducts TDS at 10%. Investors must declare this income and claim credit for the TDS while filing their tax returns.
3. Form 15G/H: Individuals whose total income is below the taxable limit can submit Form 15G (for individuals) or Form 15H (for senior citizens) to the bank or company to avoid TDS deduction.

Tips for Investing in Corporate Fixed Deposits

1. Assess Credit Ratings: Always check the credit rating of the issuing company. Higher ratings indicate lower risk.
2. Diversify Investments: Spread investments across multiple companies and sectors to mitigate risk.
3. Check Interest Payment Frequency: Choose an interest payment frequency that aligns with your financial needs—monthly, quarterly, or annually.
4. Evaluate Lock-In Period: Consider the lock-in period and premature withdrawal penalties before investing.
5. Stay Updated on FD Tax Rules: Be aware of the latest FD tax rules and regulations to optimise your returns.

Conclusion

Corporate fixed deposits offer an enticing proposition with their higher interest rates and fixed income potential. However, the associated risks necessitate careful evaluation and due diligence. By prioritising high credit ratings, assessing the financial health of the issuer, and leveraging fixed deposit apps for informed decision-making, investors can mitigate risks and maximise returns. Understanding the FD tax implications further ensures that investors can optimise their investment strategy effectively. While corporate FDs are not entirely risk-free, they can be a valuable component of a diversified investment portfolio for those willing to undertake a higher risk for better returns.

To experience the convenience of managing fixed deposits digitally, consider using the Bajaj Finserv app. With its user-friendly interface and comprehensive features, the app simplifies the process of investing in FDs, ensuring you can make the most of this timeless financial instrument.