With equity markets being in a bearish phase combined with low returns on bank deposits and debt MF schemes, corporate fixed deposits have become the latest buzzword with investors. However, should you opt for them?
The reasonably safe FDs issued by high-quality corporates are fetching barely 1% more return than the bank fixed deposits.
Corporate fixed deposits (FDs) have become the latest buzzword with investors. Equity markets in a bearish phase combined with low returns on bank deposits and debt mutual fund schemes have contributed to their popularity. Tempted by the attractive commissions which corporates offer for marketing these deposits, many advisors have lately become very active in this market.
“Corporate FDs are bring peddled as guaranteed and secure products. The reality, however, is very different. The reasonably safe FDs issued by high-quality corporates are fetching barely 1% more return than the bank fixed deposits. Add to that their lock-in period of 3 to 5 years and you hardly have any great reason for choosing them. To overcome these advisors are pushing sub-quality FDs which offer around 2% higher than bank fixed deposit rates. What is being conveniently ignored is the probability of default after a 5-year holding period,” says Ashish Kapur, CEO, Invest Shoppe India Ltd.
It may be noted that bank fixed deposits are considered one of the safest investment avenues, while the FDs offered by NBFCs and corporates are said to be a bit risky. Still, a large number of people prefer to go for corporate fixed deposits because they offer higher rates than those provided by bank FDs. Corporate deposits are usually issued by manufacturing firms and non banking financial companies (NBFCs), and provide higher returns than bank FDs as nothing is guaranteed to the investor in case of a default. Therefore, you should opt for AAA, AA+ or similarly rated deposits of well-established corporates only.
Also, corporate FDs should be used for investing only that money which can be spared for the duration of the deposit. All assurances of listing on NSE or other exchanges are to be taken with a pinch of salt as volumes may or may not get generated in any particular FD series.
Top FD rates offered by NBFCs
Top FD rates offered by banks
Once you have put aside the money which can safely be parked for a longer duration, go for only the very large, well-established corporates having unblemished track record of honouring their commitments and investor friendliness. “There are, however, very few such corporates and usually they don’t offer very attractive returns. But they are the only ones that qualify as investment worthy. The moment any risk gets involved, investors are better off with mutual funds or equity markets as at least they have commensurate return possibilities,” says Kapur.
Published in Financial Express.