Should you invest in Corporate FDs?

Company FD is a term deposit with a maturity period ranging from a few months to a few years, held for a fixed tenure and at a fixed rate of interest. These deposits are offered by both financial and non-banking financial companies (NBFCs) and interest is paid monthly, quarterly, half-yearly or annually.

The need to beat rising inflation while sticking to low-risk investment options has recently become a challenge for investors. Bank Fixed deposit Were a good option in the past, but do not provide any such relief in the present scenario.

For example, HDFC Bank, India’s largest private lender, is offering an interest rate of 5.60% per annum on fixed deposits of as low as Rs. 2 crore for a tenure of more than five years.

On similar fixed deposits, State Bank of India (SBI) is offering 5.40% interest per annum. Notably, India’s retail inflation has been hovering around 6% over the past few months.

On the other hand, company or corporate fixed deposits can offer returns of up to 8% per annum despite the high risk. But are these tools worth the risk?

An important difference between bank FD and company FD is security. As per the Deposit Insurance and Credit Guarantee Corporation (DICGC) Act, every depositor in the bank has to 5 lakh for both principal and interest amount. However, this safety net is not available with company FDs, where investors can lose their entire capital if the company defaults.

Interest accrued above, as per taxation 5,000 in a year is taxable in a company FD as per the income tax slab of the investors. The company will also deduct tax at source (TDS) at 10% on the interest earned for resident Indians.

According to Suresh Sadagopan, Managing Director and Principal Officer, Ladder7 Wealth Planners, corporate FDs can be a good option for investors with low or zero income tax slabs.

“But for someone in a high tax lab, company FDs are not necessarily a great tool. Debt mutual funds are better in this regard as they will give better tax adjusted returns.”

Hence, for people in the highest tax bracket, investing in a corporate FD may not make sense.

There are three ways to choose a company FD. The first is checking the credit rating. A company’s AAA credit rating indicates the highest security of interest payments. As you move down the rating chart, the degree of protection decreases, even though the return on the instrument increases.

A major determining factor for investors is that a company must have been in operation for at least two decades and is performing well. They should check whether the company has defaulted on any payments in the past. The third criterion should be the payment of interest rates.

However, keep in mind that even AAA-rated FDs have defaulted in the past. “After the DHFL case, which was AAA-rated, there is always a risk of losing the entire capital. Essentially, corporate FDs should not be considered from the return angle,” said Nishith Baldevdas, founder, Shree Financial.

Baldevdas, a SEBI registered investment advisor, recommends company FDs of Housing Development Finance Corporation Ltd (HDFC), which has been rated AAA by Care Ratings Ltd and Icra Ltd.

However, some experts are of the opinion that HDFC, post its merger with HDFC Bank, may stop offering company FDs.

“It is too soon to comment on what the post-merger entity will look like. Generally, a bank cannot issue a company FD. So there is a possibility that the amalgamated body will be allowed to do so,” said Adil Shetty, CEO, bankbazaar.com.

“That said, an FD is essentially a contract between the depositor and the deposit-taking entity, and the existing FD rates and terms and conditions surrounding FDs will remain in force till the maturity of the FD. Hence, all existing company deposits are expected to continue till maturity,” Shetty said.

Experts say that investors should stay away from corporate FDs. Also, one cannot withdraw money for the first three months even in case of emergency. Safer Options Available: DCB Bank and IndusInd Bank are offering FDs for around 6% interest per annum.