When companies need to raise capital in a short period of time, they offer Fixed Deposits (FDs) to general public at attractive rates. Investors are issued Certificate of Deposits of different tenures at fixed interest rates in such times. Let’s look at how these Corporate FDs compare vis-a-vis traditional Bank FDs:
1. Corporates that have high credit ratings offer better rates on their FDs vis-a-vis Bank FDs. They offer FDs for different tenures ranging from 1-5 years.
2. Corporates with lower credit rating offer higher interest rates than highly rated corporates to make up for the default risk.
3. As a cardinal rule, investors should avoid Corporate FDs which offer interest rates of 12% and above as these are largely unsecured instruments. High interest rates does not mean higher reputation or credit standing of the borrowing corporate.
4. In terms of security, Bank FDs are secured by RBI upto Rs.1 lakh. Corporate FDs do not offer any such security to your deposits with them. It might default on interest payments and might not return the principal amount at maturity. To compensate for this risk, corporates offer higher interest rates on their FDs vis-a-vis banks.
5. Bank FDs with 5-10 year lock-in periods offer IT benefit under Section 80C. However, they cannot be withdrawn prematurely. Also if the annual interest income on FD exceeds Rs.10,000, then TDS is deducted by banks. Incase of Corporate FDs, TDS is typically deducted if the interest income exceeds Rs.5,000 in a year.
6. Should an investor decide to add returns, they may invest in high-rated corporates with AAA or equivalent rating. Further, investor should ideally select short-tenure FDs as against longer tenures to avoid possible business cycle downturns. «GM»
Source Credit: Based on original article by Sakshi Denis as published by NDTV Profit on Jun22, 2018