NEWS
A whopping 9.1% return or a government guarantee? Which is better between bank and corporate FDs?
Corporate FDs vs. Bank FDs: Corporate FDs offer returns of up to 9.1% per annum, which is typically 1-3% higher than bank FDs, making them an attractive option for better returns. However, they also carry less risk.
Corporate FD vs Bank FD: Which is better?
FD Investment Alert: Fixed deposits (FDs) have long been one of the trusted investment options for Indians because of the tax benefits they offer along with guaranteed returns.
There's no risk of losing money in fixed deposits because they're not market-linked, meaning they're not affected by market fluctuations. This is why people often prefer bank fixed deposits for investment. However, in recent years, corporate or company fixed deposits have also become popular because they typically offer higher interest rates.
What is the difference between the two?
Unlike bank FDs, corporate FDs are managed by non-banking financial companies (NBFCs), housing finance companies (HFCs), and other financial institutions. The company collects money from investors and returns it with interest over a specified period of time. For this, the company issues a form, which can now be easily filled out online. Overall, both corporate FDs and bank FDs are alternatives to fixed deposits, with the only difference being the risk and returns. While corporate FDs typically offer higher interest rates than bank FDs, they also carry higher risks.
How does Corporate FD work?
In a bank FD, you deposit money with a bank, and the bank pays you interest. Similarly, in a corporate FD, you essentially lend money to large companies at interest.
Many large companies need money to run their businesses, so they borrow from the public and, in return, offer higher returns than banks. In this method, you deposit your money with the company for a fixed period (1, 2, or 5 years). The company gives you a certificate detailing all the details, including interest. Upon maturity, you receive your principal back along with interest.
How different is Corporate FD from Bank FD?
The government guarantees the security of bank FDs. In the event of a bank collapse, the government guarantees insurance up to ₹5 lakh. However, corporate FDs offer no government guarantee. If the company goes bankrupt, your money could be lost. To compensate for this risk, companies offer 1-2% higher interest rates than bank FDs.
Bank FD vs Corporate FD
| Features | Bank FD | Corporate FD |
| interest rate | Typically ranges from 6.50%-7.80% | 7.90% - 9.10% |
| Security Guarantee | Insurance up to Rs 5 lakh under RBI's DICGC scheme | No government guarantee |
| liquidity | Withdraw anytime with a 0.5% - 1% penalty | Initial lock-in for 3 months |
| Method of evaluation | RBI monitors | Relying on rating agencies |
3 major risks of corporate FDs
- As mentioned earlier, the government guarantees up to ₹5 lakh in the event of a bank collapse. However, with corporate FDs, if the company collapses or goes bankrupt, your entire money could be lost.
- Corporate FDs have a longer lock-in period. RBI regulations prohibit withdrawals from corporate FDs within the first three months. Withdrawals within 3-6 months offer no interest.
- Only those companies whose rating is 'A' or 'AA' offer interest up to 9.10% in corporate FD.
How to identify a safe company?
Rating agencies like CRISIL or ICRA issue certificates to companies after assessing their security. Based on this, you can get an idea.
AAA – This is the safest option. The risk of losing money is negligible.
AA or A- This is also safe to a great extent, but there remains a risk in it.
B or C – Companies with this rating are extremely risky. The risk of losing money is much higher.
