Fixed Deposit

Fixed Deposits: A Reliable Investment Option in India

Fixed deposits (FDs) remain one of the most preferred investment avenues in India. According to the Reserve Bank of India (RBI), 56% of household financial assets are held in bank FDs. Additionally, corporate fixed deposits (corporate FDs)-offered by non-banking financial companies (NBFCs)-function similarly to bank FDs but typically provide higher interest rates, making them a favoured option among informed investors.

Bank FD vs. Corporate FD: Key Comparisons

1. Rate of Return

Corporate FDs generally offer higher interest rates compared to bank FDs. For instance, the current 3-5-year FD rate in SBI stands at 7.5%, whereas Bajaj Finance offers 8.35% for a 1-3-year FD. The interest rate on corporate FDs varies depending on the company's credit rating, which we will discuss further.

2. Tenure

Bank FDs: Investment periods range from 7 days to 10 years.

Corporate FDs: Typically, available for 12 months to 4-6 years.

If you're looking for long-term investments (8-10 years), bank FDs remain the primary choice. However, for shorter tenures, corporate FDs offer attractive returns.

3. Lock-in Period & Liquidity

Bank FDs have no lock-in period, ensuring high liquidity.

Corporate FDs may enforce a lock-in period of 3 months, restricting premature withdrawals during this period. However, not all corporate FDs impose lock-in periods.

4. Premature Withdrawals

Both bank and corporate FDs allow premature withdrawals, subject to penalties. Bank FDs provide better flexibility due to higher liquidity and lower withdrawal penalties. Investors must weigh this liquidity against the higher returns offered by corporate FDs.

5. Taxation

The taxation policy remains the same for both bank and corporate FDs. Interest income is added to your taxable income and taxed according to your income tax slab.

Key Factors to Consider When Investing in Corporate FDs

Interest Rates

NBFCs offer varied interest rates based on tenure and financial stability. Investors must compare different FDs to make an informed decision, while also considering credit risk.

Credit Risk

Credit risk refers to an NBFC's ability to meet principal and interest obligations. Investors should check credit ratings to evaluate financial stability before investing.

Tenure-Based Interest Rates

Corporate FDs offer higher interest rates for longer tenures, which investors should assess based on financial goals.

Interest Pay-Out Options

Corporate FDs provide two interest pay-out modes:

Periodic Interest Pay-Out (Non-Cumulative): Interest is paid monthly, quarterly, half-yearly, or annually.

Cumulative Interest Pay-Out: Interest is reinvested, benefiting from compounding returns.