Should you invest in corporate funds?

A corporate FD is a term deposit that is held for a fixed period and at a fixed interest rate, with maturities ranging from a few months to a few years. These deposits are offered by financial and non-banking companies (NBFC) and interest is paid monthly, quarterly, semi-annually or annually.

The need to fight rising inflation while sticking to low risk investment options has become a challenge for investors lately. Term bank deposits were a good option in the past, but do not offer such relief in the current scenario.

For example, HDFC Bank, India’s largest private lender, offers an interest rate of 5.60% per annum on term deposits below 2 crore for a term of more than five years.

On similar term deposits, the State Bank of India (SBI) offers interest at 5.40% per annum. Notably, retail price inflation in India has hovered around the 6% mark in recent months.

On the other hand, corporate or corporate term deposits can offer up to 8% return per year, albeit at higher risk. But are these instruments worth the risk?

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A key difference between bank FDs and corporate FDs is security. In accordance with the Law on the Deposit Insurance and Credit Guarantee Company (DICGC), each depositor of a bank is insured up to a maximum of 5 lakh for principal and amount of interest held. However, this safety net is not available with FD companies, where investors can lose all of their capital if the company defaults.

Taxation, interest earned above 5,000 per annum in FD corporations are taxable under the investor income tax slab. The company will also deduct withholding tax (TDS) at 10% on interest earned for Indian residents.

According to Suresh Sadagopan, managing director and senior manager at Ladder7 Wealth Planners, corporate FDs can be a good option for investors with a lower or no income tax bracket.

“But for someone in the highest tax lab, corporate DFs aren’t necessarily a great instrument. Debt mutual funds are better in this case because they will give better tax-adjusted returns,” Sadagopan said.

Therefore, for those in the highest tax bracket, investing in corporate FDs may not make sense.

There are three ways to select an FD company. The first is to check the credit rating. The AAA credit rating of companies indicates the highest interest payment security. As you move down the odds chart, the degree of safety decreases even though the returns of the instrument increase.

A determining factor for investors is that a company must have been in business for at least two decades and that it is performing well. They should check whether the company has defaulted on its payment obligations in the past. The third criterion should be the payment of interest rates.

However, keep in mind that even AAA-rated FDs have defaulted in the past. “After the DHFL deal, which was AAA rated, there is always a risk of losing all the capital. Essentially, the FD of companies should not be viewed from a yield perspective,” said Nishith Baldevdas, Founder of Shree Financial.

Baldevdas, who is a registered investment adviser with Sebi, recommends FD companies from Housing Development Finance Corporation Ltd (HDFC), which is rated AAA by Care Ratings Ltd and Icra Ltd.

However, some experts are of the opinion that HDFC, after its merger with HDFC Bank, may stop offering DFs to businesses.

“It is too early to comment on what the post-merger entity would look like. Generally, a bank cannot issue corporate DFs. So the chances of the merged body being allowed to do so are slim” , said Adhil Shetty, CEO of Bankbazaar.com.

“That said, FDs are essentially a contract between the depositor and the institution receiving the deposit, and as such the existing FD rates and terms around the FD will continue until the FD matures. As such, all of the company’s existing filings should continue as is until maturity,” Shetty added.

Experts say investors should ideally stay away from FD companies. In addition, one cannot withdraw money during the first three months, even in an emergency. There are safer options: DCB Bank and IndusInd Bank offer FD for around 6% interest per annum.

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