Is Corporate FD"s better bet than bank FD"s?
The fixed deposit space in the industry is gaining some attention as top coporates are raising funds for their companies through the FD window. Recently Tata Motors has introduced a fixed deposit scheme where by an interest rate of 11% is offered for deposits parked for three years and the firm has a sanction to raise up to Rs 1,931.5 crore from the public. Bank fixed deposits are one of the most famous and safest saving instrument for years. But the trend is changing since last one and half year. Till last year bank was providing healthy deposit rates, but now it is 6-7% for1-3 years. In comparison of Banks corporate FD's are providing more than 10% interest for same tenure.
In recent years, liquidity crunch has changed Indian Inc's Fund raising plans. Recently many companies in need of capital have launched fixed deposit schemes, and in many cases they offer higher rate than Banks. In fact, FD schemes are not new to Indian Inc. Earlier, every major company had an FD department and it was considered to be one of the main sources of funding. However, this way of funding perished slowly as it became easier for companies to raise funds through equity and quasi equity. Number of reputed companies like ICICI, EXIM, JK industry, Jindal steel, HDFC, Godrej industry etc. are aggressively raising deposits from public. Nevertheless one needs to do some back-ground research on the company before queuing outside their office. One also needs to balance the rewards with risks.
Corporate Fixed Deposits:
Corporate FD's are not new but it was neglected for long time. Corporate FDs are offered by companies that are looking to raise money from the open market. Corporate FDs typically pay a higher rate of interest, but also carry a relatively higher risk than bank FDs. They are very much similar to bank fixed deposits the difference: one parking his money with company instead with bank for a fixed duration and in return the company will offer interest at a predetermined rate on amount deposited, like bank tenure ranges from 1-7 years.
Risk associated with Corporate FDs:
This investment option is not as safe as bank fixed deposits. The bank fixed deposits up to Rs. 1 lakh are secured by deposit insurance and credit Guarantee Corporation. In contrast, corporate deposits offers no such protection.
Recent Examples:
TATA Motors
Tenure: 2 Years.
Cumulative interest rate 8%
Minmum amount Rs.20,000.
Mahindra Finance
Tenure: 2 Years
Cumulative interest rate 8.5%
Minmum amount Rs.10,000
Sriram Transport finance
Tenure: 2 Years
Cumulative interest rate 9.74%
Minmum amount Rs.25,000
Investment decision:
Higher the promised return, greater is the risk, If company is promising very high return compare to the market rates then check fundamentals & business of the company. Also look through the rating given by standard rating agency to the respective FD scheme. Avoid investing for longer period in corporate FDs. Normally, investors park funds in short-term deposits with tenures ranging from 46 days to six months because they anticipate a major expense. Banks offer 3.5-5.75 per cent for this tenure. However, increasing the tenure to, say, a year will fetch you 5.5-6 per cent. This makes more sense, as you can easily break your FD if you need the money urgently. For a little more risk, income funds and short-term debt funds are alternatives. Returns from better-managed income funds for a six-month period are 5-7 per cent per annum. Income funds also let you exit any time, the only hassle being exit loads of up to 0.5 per cent in some cases.
In recent years, liquidity crunch has changed Indian Inc's Fund raising plans. Recently many companies in need of capital have launched fixed deposit schemes, and in many cases they offer higher rate than Banks. In fact, FD schemes are not new to Indian Inc. Earlier, every major company had an FD department and it was considered to be one of the main sources of funding. However, this way of funding perished slowly as it became easier for companies to raise funds through equity and quasi equity. Number of reputed companies like ICICI, EXIM, JK industry, Jindal steel, HDFC, Godrej industry etc. are aggressively raising deposits from public. Nevertheless one needs to do some back-ground research on the company before queuing outside their office. One also needs to balance the rewards with risks.
Corporate Fixed Deposits:
Corporate FD's are not new but it was neglected for long time. Corporate FDs are offered by companies that are looking to raise money from the open market. Corporate FDs typically pay a higher rate of interest, but also carry a relatively higher risk than bank FDs. They are very much similar to bank fixed deposits the difference: one parking his money with company instead with bank for a fixed duration and in return the company will offer interest at a predetermined rate on amount deposited, like bank tenure ranges from 1-7 years.
Risk associated with Corporate FDs:
This investment option is not as safe as bank fixed deposits. The bank fixed deposits up to Rs. 1 lakh are secured by deposit insurance and credit Guarantee Corporation. In contrast, corporate deposits offers no such protection.
Recent Examples:
TATA Motors
Tenure: 2 Years.
Cumulative interest rate 8%
Minmum amount Rs.20,000.
Mahindra Finance
Tenure: 2 Years
Cumulative interest rate 8.5%
Minmum amount Rs.10,000
Sriram Transport finance
Tenure: 2 Years
Cumulative interest rate 9.74%
Minmum amount Rs.25,000
Investment decision:
Higher the promised return, greater is the risk, If company is promising very high return compare to the market rates then check fundamentals & business of the company. Also look through the rating given by standard rating agency to the respective FD scheme. Avoid investing for longer period in corporate FDs. Normally, investors park funds in short-term deposits with tenures ranging from 46 days to six months because they anticipate a major expense. Banks offer 3.5-5.75 per cent for this tenure. However, increasing the tenure to, say, a year will fetch you 5.5-6 per cent. This makes more sense, as you can easily break your FD if you need the money urgently. For a little more risk, income funds and short-term debt funds are alternatives. Returns from better-managed income funds for a six-month period are 5-7 per cent per annum. Income funds also let you exit any time, the only hassle being exit loads of up to 0.5 per cent in some cases.