On the lines of traditional fixed deposits which are so popular among the majority of people,some corporate houses too provide Fixed Deposit (FD) Schemes.These FDs help these corporate in raising money from the public which they may use in their business expansion or and debt payments.In return they promise higher returns than the traditional counterparts.This is usually 1-2 % higher,depending upon the tenure chosen for the deposit.The longer the tenure the higher is the return.For senior citizens,there is benefit of additional 0.25% on returns.By doing so,the company is able to raise money comparatively cheaply when compared to loans etc.
There are some other benefits too offered by these FDs in addition to higher returns which makes them worth parking money.Let us have a look at the advantages of corporate FDs –
1. Higher Return – The Interest Rates offered by these FDs are higher than traditional FDs.Tenure for most of the FDs ranges from 1 year to 5 years and it can be higher depending upon the individual company.Higher tenure scheme gives higher rate of interest.Senior citizens get 0.25% higher returns than normal.
2. Regular Interest Payment – You can get the Interest earned on these schemes on regular interval of monthly,quarterly,half yearly or yearly.You also have the option of getting cumulative interest where you get all your interest and capital on maturity.
3. Loan against FD – You have the provision of getting loan against the FD amount to the tune of 75% of your fixed amount.Of course,this depends solely on the discretion of the company.Usually the loan is disbursed at a rate of 2% higher than the rate you are earning on your FD.
Risk with Corporate Fixed Deposit :-
Looking at the above features of these FDs,question arises is should you opt for these FDs?Well,higher returns only come at the cost of higher risk.The fact is that though these schemes are regulated according the the rules of a local regulatory body,that body doesn’t take responsibility of payment to the investor.In case of company default,the risk of loosing money is there.
Regarding the redemption or withdrawal of your money,these are supervised by guidelines issued by the regulatory authority.Usually you will not get your capital if you apply for withdrawal within the first three months of your FD start date.After three months and before six months,no interest is paid.After six months but before maturity,you may get interest lower by 2-3% than the otherwise payable interest on maturity.
You can minimize this risk to least by checking the credit rating of these FDs schemes from a credible credit rating agency.The schemes with AA/AAA rating are usually taken as safer for investment purposes.
So the risks notwithstanding,corporate FDs can be good alternative to traditional ones for the conservative investors if selected with proper research with regard to credit rating and going with a company with good track record and strong fundamentals.