What is a Corporate Fixed Deposit, and How Does it Work?

What is a Corporate Fixed Deposit, and How Does it Work?

What is a Corporate Fixed Deposit, and How Does it Work?

Corporate fixed deposit or Corporate FD are offered by banks and NBFC’s or Non-banking Financial Companies. It is a term deposit that is held at fixed rates of interest over a fixed tenure. The maturity tenure can be a few months to a few years. The highest FD rates can be availed when you invest in this instrument.

Company FD’s are the deposits placed by the investor with a company of repute. The rate of interest if fixed and financial institutions and NBFC’s are also mandated to accept these FD’s along with major banks. The Companies Act under Section 58A regulates this segment. This is a segment that can garner higher returns but is a tad risky as an investment.

Company deposits or CD’s are unsecured, and if the company defaults it is difficult to recover the capital invested too. You will not be able to sell off the documents to get your deposit back. This could be the wrong instrument if your risk appetite is very low. The best way to minimize risks and increase returns is to look for companies with certifications of AAA and AA rated Company Fixed deposits.

The benefits of Corporate Fixed Deposits over Normal Fixed Deposits

For those of you with an average or high-risk appetite and a propensity for higher returns, a Company Fixed Deposit is the best choice. Choose from deposits of multiple companies and optimize returns. The payoffs are significantly higher in Corporate FD’s than bank FD”s.

1. The payoffs are significantly higher in Corporate FD’s than bank FD”s.

2. You can choose the tenure from monthly, quarterly, biannually or annually as per your preference.

3. The lock-in periods in Corporate FD’s are typically lower, and so the instrument is highly flexible.

4. The Corporate FD from a highly rated company carries little or no risk. If you see abnormally high returns, do not invest as the riskier the company, the higher the rates of interest offered.

Can you withdraw the deposit prematurely?

Yes, you can. There are small penalties attached. You can also choose tenure as low as three months. There are some formalities that need to be done. The following documents have to be submitted.

The original FDR Certificate with all the stakeholders signature;

Canceled cheque;

A request letter from the client for premature withdrawal with viable reasons.

This makes the instrument very safe too as if you hear any bad reports about the company’s financial health; you can withdraw from the plan. The RBI has directed all financial institutions who deal in Corporate FD’s to do their due diligence thoroughly before extending corporate FD’s. The aim is to use the money collected for the very purpose for which they were collected. Once this is followed the risk component is minimal, as most financial institutions extend these Corporate FD’s to fund expansion and not revenue expenditure.

Once you have checked the credit history, ranking and rating of reputed agencies and fixed tenure of your liking, go ahead and invest in a corporate FD to earn higher returns in a shorter time.

Tom Spiggle

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