Overview
Fixed Deposits are among the safest investments, providing risk-free and guaranteed returns. That is why they are a favorite investment choice among individuals seeking a secure and steady source of multiplying their savings.
The two most common types of fixed deposits are bank and corporate fixed deposits, each with benefits and challenges. When selecting a fixed deposit (FD), investors decide between a bank FDs or a corporate FD. What are the differences, and what are the factors to be considered in investing in either type of fixed deposit?
This blog will delve into the nuances of Bank FDs and Corporate FDs which will help individuals choose between the two after carefully weighing the risks and returns.
First, let’s understand what Bank and Corporate Fixed Deposits are.
Bank Fixed Deposits:
A bank fixed deposit (FD) is an investment where an individual deposits a lump sum of money with a bank for a set period at a fixed interest rate. The interest rate is fixed and the depositor earns interest on the amount deposited. FD holders can receive the interest through the cumulative or the non-cumulative option. In the cumulative option, the interest is compounded annually and reinvested along with the principal amount, resulting in higher overall returns at maturity. In non-cumulative FDs, the interest is paid monthly, quarterly, half-yearly, or annually, and the principal is returned at the end of tenure.
Corporate Fixed Deposits:
A Corporate FD is a type of fixed deposit offered by corporate organizations or non-banking financial companies (NBFCs) to raise funds from the public for various reasons. They are similar to bank FDs but offer higher interest rates. Here, investors deposit a lump sum for a specific tenure, ranging from a few months to a few years, and the company provides a fixed interest rate throughout the period.
Investors can opt for the cumulative option, where interest is compounded annually and paid at maturity along with the principal. Conversely, they may choose the non-cumulative option, where interest is paid out periodically and the principal is returned at the end of the tenure.
Bank FDs vs Corporate FDs: A Comparison
When it comes to fixed deposits, Bank FDs may seem like a haven for investors. However, with the changing financial scenario, both potential and established investors are turning towards investing in corporate financial institutions as well.
Similarities between Bank FD and Corporate FD
- Guaranteed returns- Both bank and corporate fixed deposits offer fixed returns. With this advantage, you can plan your financial future confidently. You can further check your FD returns using an FD calculator and estimate your potential earnings.
- Higher returns- Similar to most bank deposits, many corporate fixed deposits offer higher interest rates for investors.
- Flexible tenor- You can select from a wide range of tenures to suit your individual needs. The interest rate varies with the duration—the longer the tenure, the higher the interest rate.
Now let’s take a look at a few of the differences between bank and corporate FD.
- Interest rates- The interest rates offered by Corporate FDs are generally higher than bank FDs.
- Tenor- The tenor of corporate FDs typically ranges from a few months to a few years whereas bank FDs tenor spans from seven days to ten years.
- Risk- Corporate FDs are riskier than bank FDs as they do not have security cover of up to Rs.5 lakhs by Deposit Insurance and Credit Guarantee Corporation (DIGCC) like bank FDs do.
Do Corporate FDs carry higher risks?
Since corporate FDs are unsecured, many individuals are hesitant to invest since they have the fear of losing their money if the company defaults. However, all NBFCs/companies that want to collect deposits have to follow stringent regulations and guidelines laid down by the RBI/ Ministry of Corporate Affairs (MCA) to collect deposits. Therefore, out of more than 10,000 NBFCs in India, only a handful can accept public deposits. These measures ensure minimal risk for investors when putting the money in corporate FDs.
Credit rating agencies assign ratings based on the assessment of the NBFCs and corporations that issue corporate FDs. Corporate FDs with higher ratings are generally considered lower risk meaning these FDs have lower chances of default in paying out the principal and interest.
Unlike bank FDs, corporate FDs are not secured by the Deposit Insurance and Credit Guarantee Corporation (DIGCC), investors should conduct thorough research to evaluate the ratings and creditworthiness of the financial institutions before investing.
Conclusion
Summing up, both bank and corporate fixed deposits have their pros and cons. Depending on your financial goals and risk tolerance, you can choose to invest in either of the two as fixed deposits are considered as a reliable investment option. Further, you can visit thefixedincome.com to select the best options available and invest in them seamlessly.
Disclaimer: Fixed Deposits are regulated by RBI. Investments in debt securities/ municipal debt securities/ securitised debt instruments are subject to risks including delay and/ or default in payment. Read all the offer-related documents carefully.
FAQs
Q1. Are bank fixed deposits safe?
Ans: Bank fixed deposits (FDs) are considered safe as RBI regulates them to ensure banks maintain financial stability. Moreover, DICGC insures deposits up to ₹5 lakh per depositor, protecting in case of bank failure.
Q2. What are corporate fixed deposits, and how do they work?
Ans: Corporate fixed deposits are investment products offered by companies; they offer higher interest rates for a specific period. They are not insured by DICGC. They carry a higher risk if the company encounters financial difficulties.
Q3. Are the interest rates offered by banks and corporations for fixed deposits the same?
Ans: No, the interest rates offered by banks and corporations for fixed deposits are not the same. Usually, corporate fixed deposits offer higher interest rates compared to bank fixed deposits due to the higher risk associated with corporate FDs, which are not covered by deposit insurance like bank FDs. Banks typically offer lower rates but are generally a safer investment option.
Q4. Can I take a loan against a bank’s fixed deposit?
Ans: Yes, you can take a loan against a bank’s fixed deposit. Most banks offer loans up to 70% of the value of the fixed deposit at interest rates that are slightly higher than the FD itself. Thus you can access funds without having to break the deposit prematurely, thereby retaining the ability to earn interest.
Q5. Are corporate FDs taxable?
Ans: Yes, interest earned on corporate fixed deposits is taxable under ‘Income from Other Sources’ and is taxed as per the individual’s income tax slab rates. If the annual interest exceeds a certain threshold, TDS (Tax Deducted at Source) is applied, subject to prevailing tax laws.
Q7. Are corporate FDs safe?
Ans: Investing in corporate Fixed Deposits carries more risk compared to bank FDs, as they are not covered by deposit insurance. Their safety largely depends on the financial health and stability of the issuing company. However, investors should carefully evaluate the company’s credit rating before investing.
Q8. What is the minimum period for corporate FD?
Ans: The minimum period for corporate fixed deposits typically ranges from 6 months to 1 year, varying by company.
