Corporate Fixed Deposit Vs Bank FD – Which is Better?

When it comes to investments, fixed deposits (FDs) have long been the go-to option for individuals looking for stability and reliable results. However, FDs are not limited to traditional bank fixed deposits. 

Corporate fixed deposits have become popular as an alternative investment avenue in recent years. But how do you select the best deposit? 

In this blog, we'll highlight the difference between bank and corporate fixed deposits and explain the features of both to help you make an informed decision.

Meaning of a Bank FD

A Bank Fixed Deposit (FD) is a financial instrument offered by banks where you deposit a lump sum amount for a fixed tenure at a predetermined interest rate. It is considered a low-risk investment as the returns are guaranteed, and the principal amount is protected. 

Bank FDs offer varying interest rates based on the tenure and are typically insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC) up to ₹5 lakh. These FDs are ideal for conservative investors looking for a safe, predictable return on their investment.

Meaning of a Corporate FD

A Corporate Fixed Deposit (FD) is a fixed deposit offered by companies or corporations. Similar to a bank FD, you deposit a sum of money for a specified tenure, and the company offers you interest on the principal. 

However, corporate FDs generally provide higher interest rates than bank FDs due to the increased risk. The returns are not guaranteed by government agencies, which makes them riskier. As a result, you must carefully assess the company’s financial health before investing. Corporate FDs are suitable for those willing to take on more risk in exchange for potentially higher returns.

Difference between Corporate FD and Bank FD

Bank FDs are deposits made with banks where you park your money for a fixed period in exchange for a predetermined interest rate. 

Corporate FDs, on the other hand, are offered by non-banking financial companies (NBFCs), housing finance companies (HFCs), and corporations. These institutions raise funds through FDs to meet their financial needs. While corporate FDs often offer higher interest rates than bank FDs, they come with a slightly higher risk. 

Let's compare these two types of FDs based on different parameters:

How do you choose between Corporate FDs and bank FDs?

Deciding the best option between corporate FDs and bank FDs depends on factors like financial goals, risk tolerance, and investment preferences. Here are a few things that you must consider to make an informed choice:

1. Your financial goals and risk tolerance

Start by defining your financial objectives. Are you seeking short-term liquidity, regular income, or long-term wealth accumulation? A bank FD will be a better choice if you're a risk-averse investor looking for a safe and reliable investment. Similarly, opt for corporate FDs if you're willing to take some risk for better returns.

2. Investment horizon

Determine the duration you wish to stay invested in the fixed deposit. Bank FDs often offer flexibility in terms of tenure, allowing you to match your investment with your preferred tenure. Corporate FDs may have a predefined maturity period, so select one that aligns with your horizon.

3. Consult with a financial advisor

If you're new to investments and can't decide between corporate and bank FDs, seeking expert guidance is always best. A qualified financial advisor can offer personalized recommendations based on your goals and risk appetite to help you make the right choice.

Advantages of Investing in a Fixed Deposit

• FDs are low-risk investments, with your principal amount fully protected.
• FDs offer fixed interest rates, ensuring predictable and stable returns.
• You can choose from different tenures, ranging from a few months to several years.
• Banks allow premature withdrawals, though with a penalty on interest.
• Certain FDs qualify for tax deductions under Section 80C of the Income Tax Act.

Advantages of Investing in a Corporate FD

• Corporate FDs offer higher interest rates compared to bank FDs, which can boost returns.
• If you’re willing to take on higher risk, corporate FDs can offer better growth potential.
• Many corporate FDs offer long, flexible tenures, allowing you to invest for extended periods.
• Adding corporate FDs to your portfolio diversifies your investments beyond bank deposits, balancing risk, and return.
• CRISIL and ICRA provide safety ratings to assess the safety and credibility of the business offering the corporate FD.

To wrap up

There is no one-size-fits-all answer when choosing between corporate and bank FDs. Your decision should depend on your financial circumstances, risk tolerance, and goals.

Visit Tata Capital Moneyfy's official website to consult experts and make informed investment decisions.

FAQs

What are corporate fixed deposits, and how do they work?

Corporate fixed deposits are investment schemes offered by companies where investors deposit money for a fixed tenure at a predetermined interest rate. The funds are used by companies for business purposes, and investors receive interest at regular intervals.

How do you purchase a company's FDs?

To purchase a company’s fixed deposits, investors can apply directly through the company’s website, through designated agents, or via authorised financial institutions, or brokers, after ensuring they meet the company’s eligibility criteria.

Is the interest rate offered by banks and corporations for fixed deposits the same?

No, corporate fixed deposits generally offer higher interest rates than bank fixed deposits due to the higher risk associated with the investment. Banks offer lower rates due to their secure and regulated nature.

Would I be able to take a loan amount against a bank's fixed deposit?

Yes, you can take a loan against a bank's fixed deposit, up to a certain percentage of the FD amount, at a lower interest rate. This is a secured loan, with the FD acting as collateral.

Is it possible for NRIs to invest in corporate fixed deposits?

Yes, NRIs can invest in corporate fixed deposits, provided the company offers this option. NRIs typically invest through NRO accounts, subject to regulatory guidelines and compliance with FEMA (Foreign Exchange Management Act).