Are you looking forward to building a quality investment portfolio? Make sure that there are both equity components and debt instruments for maintaining a risk-returns balance. Corporate Fixed Deposits are term deposits that need to be held for a specific tenure and offer an interest rate that’s fixed. The regulators have placed a framework for issuing Fixed/Public Deposit instruments. For the issuing company, fundraising through the FD route is an easier option. The NCLT law has changed the fixed income market landscape in India as the investor can close down the borrowing company in case of default.
Benefits of Investments into Corporate Deposits
Here are some reasons why most investors have been leaning towards investing in corporate FDs. Let’s take a look.
1. Higher Returns and Stability compared with banks and other asset class
The interest rate of Corporate FD are higher when we compare it with bank FDs and other similar instruments. The spread between Bank FDs and Corporate deposits is around 3 % per annum. Similar to bank FDs, the interest rates also are higher for a senior citizen. This makes it an attractive scheme for a combined periodic and sustainable payouts with accurate predictability.
2. Nominee Facility
The interest rate of Corporate FD are higher when we compare it with bank FDs and other similar instruments. The spread between Bank FDs and Corporate deposits is around 3 % per annum. Similar to bank FDs, the interest rates also are higher for a senior citizen. This makes it an attractive scheme for a combined periodic and sustainable payouts with accurate predictability.
3. Perfect For Short Term
The bank FDs provide tenure ranging from just a few days to over a few years. But a Corporate FD mainly works as a short to medium term investment and has shorter tenure not usually higher than five years. Like Bank FDs – there are short term papers issued by banks ranging from a few days to a few years.
4. Bond Ratings – By Credit Rating Agencies.
Corporate FDs are rated by reputable agencies such as ICRA, CRISIL, or CARE that will track a company’s financial health and ability to repay the interest and principal on maturity.The rating performs through due diligence on not only the financial health of the company but also on other activities and off balance sheet operations.
This helps the investor to understand the risk of investing in the underlying companies.
5. Taxation
There are a variety of Corporate FDs that bring tax efficiency for investors by paying higher or lower maturity value.
Pointers to Keep In Mind Before Investing in Corporate FDs
- Risk Factor: There are fundamentally two types of risk. Default risk on interest and maturity payment and secondly the interest rate risk.
- Eligibility of Investors: All individuals over 18 years of age, HUF, Companies, partnership firms, NRI are eligible to invest in corporate FDs.
- Pre-Closure: The process of pre-closure in Corporate FDs is in line with the Bank FDs.
Conclusion
Corporate FDs or Fixed Income Securities offer predictable cash flow and security of the investments. Incase of company liquidation – the bondholder gets priority in terms of repayment over equity investment holders. Corporate FDs offer a higher rate of return over Bank FDs. For example – HDFC Bank offers about 5.5% rate of interest on Bank FDs, HDFC Ltd offers. 6.95 rate of interest on corporate FD. Corporate FDs also offer diversification in terms of investment diversification for investors. The recent development in NCLT law offers higher protection to the bond holders. Equity Investment offers growth with uncertainty over cash flow.