what is corporate fd, how it works

What is Corporate FD: Bank or post office fixed deposit schemes are popular in India. Fixed Deposit works like a savings instrument, in which returns are given at fixed interest over a specified period. Talking about investment, the priority of many people is FD. Where the money remains safe in the FD of the bank or post office, interest is also available at the fixed rate. However, in the last few years, most banks have cut the interest on FDs. In such a situation, corporate FD is also an option, where the interest is getting 2 to 3 percent more than the banks.

FD is a term deposit, where the investor deposits a lump sum amount for a fixed period of time. Here he gets interest at regular intervals till the maturity date. It is a single time investment and there is no need to deposit every month. You cannot withdraw money from it till maturity. If there is a need to withdraw money before maturity, then a penalty has to be paid on it. Apart from the bank, there are also corporate FDs in the market, where the interest is higher than that of the bank. However, he also has some questions in his mind regarding corporate FDs.

What is Corporate FD

Corporate FDs are issued by companies. Here the maturity period is usually 6 months to 5 years or more. The interest rate in Corporate FD is higher than that in Bank FD. But it is related to the business of companies, so the risk is slightly higher than that of a bank. If the company defaults, there is a fear of losing money. However, the risk is less in FDs of strong and highly rated companies. It works in exactly the same way as a bank FD.

Bank FDs on the other hand are issued by banks. There is a time deposit scheme in the post office. The maturity period in bank FDs can be from 7 days to 5 years and up to 10 years. There are FDs of 1 year, 2 years, 3 years and 5 years in post office. The risk in these is negligible. There is no danger of drowning money in the post office, while the risk in banks is also negligible.

Corporate FDs & Interest Rates

Mahindra Finance Ltd

Interest Rate: 5.80% to 7.45% p.a. on FDs of 1 year to 5 years.
Rating: CRISIL FAAA/Stable, ICRA MAA/Stable

Shriram Transport Finance Ltd FD

Interest Rate: 6.50% to 8.40% p.a. on FDs of 1 year to 5 years.
Rating: ICRA MAA+

PNB Housing Finance Ltd

Interest Rate: Maximum 6.95% p.a.
Rating: CRISIL- FAAA

LIC Housing Finance Ltd

Interest Rate: 5.60% to 6.60% p.a. on FDs from 1 year to 5 years
Rating: CRISIL FAAA

HDFC (upto Rs 2Cr)

Interest Rate: Up to maximum 6.55% per annum
Rating: ICRA MAAA

HUDCO

Interest Rate: Up to maximum 6.55% per annum
Rating: ICRA AAA

Sundaram Finance Company

Interest Rate: 5.72% to 6.22% p.a. on FDs from 1 year to 5 years
Rating: CRISIL FAAA

Muthoot Capital FD

Interest Rate: 6% to 7% p.a. on FDs from 1 year to 5 years
Rating: CRISIL FAAA

(Source: http://www.bankbazaar.com)

Better rated companies

Please check the credit rating of the company before investing. If companies rated AAA or AA or even better are offering FD facility, then you can invest in them. If the rating of the company is good, then the risk will be less in it. It may be that companies with weak ratings have higher interest rates, but they carry risk. Corporate FDs are a better option for shorter duration, in which the risk is reduced.

View company track record

Before investing in a corporate FD, definitely check the track record of that company. See whether the business model of the company is sustainable or not, whether profits are coming or not, whether the debt is too much or not. What is the track record of the management, whether the promoters have faith in the company or not. What is the company doing in comparison to Pierce, how is the company different from others in terms of innovation.