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How Different Corporate FDs are From Bank FDs

Introduction:

Fixed Deposits (FDs) are among India's most popular savings instruments. FDs are a type of investment in which you deposit a certain amount of money with a financial institution for a predetermined period and earn a fixed interest rate. FDs can be used for various goals and are considered relatively safe because they are not subject to market fluctuations.

There are different types of FDs, such as corporate and bank FDs. Before investing your money in an FD, you must know the difference between the two.

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What is a corporate FD?

Non-Banking Financial Companies (NBFCs), corporations, and other private entities besides banks offer corporate FDs. Corporate FDs offer the same benefits as any other FD, such as fixed rate of interest, stability, and low risk. However, they might offer higher interest rates compared to bank FDs. They also come with a higher degree of risk, as the safety of your investment depends on the institution's financial health. If the company has a strong foothold, the FD will be safer. However, if the issuing company is not as stable, the risk associated with the FD will increase.

What is a bank FD?

As the name suggests, these are offered by banks. Bank FDs are considered one of the safest investment options as well-established banks back them, and deposits up to Rs. 5 lakhs are insured under the Deposit Insurance and Credit Guarantee Corporation (DICGC) scheme. Bank FDs may offer more security than corporate FDs but generally offer slightly lower interest rates. 

Differences between corporate and bank FDs

Here are some major points of difference between the two options:

Points of difference Bank FDs Corporate FDs
Returns Generally lower interest rates compared to corporate FDs. May offer higher interest rates compared to bank FDs.
Tenure Offer a range of tenure options, typically from a few months to several years. Similar range of tenure options as bank FDs. 
Insurance Covered by government deposit insurance schemes like DICGC and offer higher safety. Not covered by deposit insurance and contain higher risk due to issuer's financial stability.
Applicability for Risk Profiles You can invest in bank FDs if you have a conservative attitude towards investing and are seeking lower risk and stable returns. You can invest in corporate FDs if you want to take on slightly higher risk for potentially higher returns.

How to select a corporate FD?

Here are some key factors to consider:

  1. Before investing in a corporate fixed deposit, gathering information about the NBFC offering the deposit is crucial. Research the NBFC's reputation in the market and understand the company's core business activities.
  2. Check whether the NBFC has a history of meeting its repayment obligations on time. This will offer you insights into the company's financial stability.
  3. Check the credit ratings assigned to the NBFC by recognised credit rating agencies such as Credit Rating Information Services of India Limited (CRISIL). An NBFC with a higher credit rating is generally considered more stable.

How to select a bank FD?

Here are the key steps to help you choose the right bank FD:

  1. Interest rates play a crucial role in determining the returns on your FD investment. Different banks offer varying interest rates on their FDs. Compare the prevailing interest rates different banks offer for the tenure you are considering.
  2. Check the penalties associated with premature withdrawal. Consider your liquidity needs before investing in an FD, and then select a bank with flexible tenure.
  3. The reputation and credibility of the bank you choose for your FD are paramount for the safety of your investment. Research the bank's history and track record.
  4. Some banks offer higher interest rates for senior citizens. If applicable, this could help you earn more. Look for such features to enhance your returns.

To sum it up

FDs stand out as a reliable and popular investment avenue in India, offering stability, fixed returns, and minimal exposure to market fluctuations. While corporate FDs might offer potentially higher returns, they come with increased risk. On the other hand, bank FDs offer relatively lower interest rates and provide a greater sense of security. Whether you opt for corporate FDs from private entities or bank FDs backed by well-established institutions, make sure to consider factors like tenure, risk appetite, and interest rates when deciding between these two investment options.

Ready to invest in bank and corporate FDs? Open a free Demat account at Motilal Oswal and take the first step towards financial growth.

 

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