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Corporate FDs vs Bank FDs: Which is Safer?

January 29, 2025

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When it comes to investing, safety is a top priority for many. According to the RBI, India has over 24.23 million fixed deposits, totaling over ₹103 trillion. The number highlights that Fixed Deposits (FDs) are still the most preferred option in Indian households. However, not all FDs are equal. Bank FDs and Corporate FDs offer different levels of risk and return. While both promise fixed interest rates, their safety profiles differ significantly.

Bank FDs are generally considered safer due to government backing. Corporate FDs that companies issue carry higher risk but often offer better returns. Understanding these differences between corporate FDs and bank FDs is crucial for making informed investment decisions.

Difference Between Corporate FDs and Bank FDs

Bank Fixed Deposits

Bank FDs are deposits offered by banks and NBFCs, where you deposit a lump sum amount for a fixed period at a predetermined interest rate. The interest is generally calculated using the compound interest method, where you earn interest not only on the principal amount but also on the interest. This makes FDs a great investment vehicle for long-term returns.

Key Features include:

Higher interest rates compared to savings accounts
Flexible investment tenure ranging from 7 days to 10 years
Multiple interest pay-out options – monthly, quarterly, annually or at maturity
Regulated by the Reserve Bank of India (RBI)
Deposits up to ₹5 lakh covered under the Deposit Insurance and Credit Guarantee Corporation (DICGC) scheme
Premature withdrawal facility for callable FDs (check penalty charges before opting)
Generally considered a low-risk investment option
Interest earned is taxable

Corporate Fixed Deposits

Corporate Fixed Deposits, also known as company deposits, are term deposits issued by corporates, including Non-Banking Financial Companies (NBFCs) and Housing Finance Companies (HFCs) to raise capital against debt.

Key Features include:

Higher interest rates compared to bank FDs
Potentially higher risk due to less stringent regulations
No coverage under the DICGC scheme
Multiple interest pay-out options
Premature withdrawal facility available
Higher investment amount

As we compare the safety aspects of these two FD types, it's important to note that the higher returns of corporate FDs come with additional considerations that investors must carefully evaluate.

Comparing FDs in Terms of Safety: Corporate FDs vs Bank FDs

Aspect	Corporate FDs	Bank FDs
Issuer	Issued by corporates	Issued by banks
Regulation	Companies Act 1956	Regulated by RBI
Safety	Generally considered less safe	Considered safer
Risk	Higher risk	Lower risk
Insurance	Not covered by DICGC	Covered by DICGC up to ₹5 lakhs
Interest Rates	Usually higher (1-3% more than bank FDs)	Generally lower but more stable
Minimum Investment	Often higher (₹25,000 or more)	Can be as low as ₹1,000
Liquidity	Less liquid may have premature withdrawal penalties	More liquid, more accessible to break
Credit Rating	It is important to check the company's credit rating	Not as crucial due to RBI regulation
Taxation	TDS applicable, taxed as per income slab	TDS applicable, taxed as per income slab
Loan Against FD	Generally, not possible	Possible (usually up to 90% of FD value)
Suitable for	Investors seeking higher returns and willing to take some risk	Conservative investors seeking secure returns

Factors to Consider When Choosing Between Corporate FDs vs Bank FDs

1. Risk Appetite

Your personal risk tolerance should guide your decision. Conservative investors may prefer the safety of bank FDs. Those seeking higher returns and willing to accept more risk might consider corporate FDs.

2. Investment Horizon

Consider your investment timeframe. For short-term goals, bank FDs offer more predictability and safety. Corporate FDs might offer better returns for long-term goals if you can tolerate short-term volatility.

3. Diversification Strategy

A balanced approach often yields the best results. Consider allocating a portion of your portfolio to bank FDs for safety. Use corporate FDs judiciously for potentially higher returns.

4. Tax Implications

Be mindful of the tax consequences. Interest earned on both bank and corporate FDs is taxable. TDS rates may differ between bank and corporate FDs.

Final Thoughts

Both Corporate FDs and Bank FDs offer safe and returns. While FD investments are safer and more accessible, corporate FDs present an opportunity for higher yields at the cost of increased risk. The key lies in understanding your financial goals, risk tolerance, and the broader economic context.

Looking to grow your savings faster? Ujjivan SFB offers a wide range of fixed deposit products. Select the FD of your choice and take a step forward to your financial goals. Alternatively, you can browse through Ujjivan SFB product suite - our wide range of financial products are designed to make your financial life better.

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FAQs

1. Are corporate FDs completely unsafe?

No, corporate FDs aren't entirely unsafe. Their safety depends on the company's financial health and credit rating. However, they generally carry more risk than bank FDs.

2. Can I lose money in a bank FD?

It's doubtful to lose money in a bank FD. They're insured up to ₹5 lakhs per depositor per bank by DICGC, and RBI strictly regulates banks.

3. What should I look for in a company before investing in its FD?

Check the company's credit rating, financial statements, repayment track record, and overall market reputation. Higher ratings (AAA, AA+) indicate lower risk.

4. Are interest rates on corporate FDs consistently higher than bank FDs?

Generally, yes. Corporate FDs often offer 1-3% higher interest rates than bank FDs to attract investors and compensate for the higher perceived risk.

5. How often should I review my corporate FD investments?

Review your corporate FD investments at least quarterly. Monitor the company's financial health, credit rating changes, and any news that might affect its repayment ability.

6. Can senior citizens invest in corporate FDs?

Yes, senior citizens can invest in corporate FDs. Many companies offer higher interest rates for senior citizens, similar to banks.

7. Is there a lock-in period for corporate FDs?

Lock-in periods vary by company. Some corporate FDs have more extended lock-in periods than bank FDs, with higher penalties for premature withdrawals.

8. How are corporate FDs taxed compared to bank FDs?

Both are taxed similarly. Interest earned is added to your income and taxed at your applicable slab rate. TDS is deducted if interest exceeds ₹5000 annually.

9. Can NRIs invest in corporate FDs?

Yes, NRIs can invest in corporate FDs, but regulations may differ. Checking the specific company's policies and relevant FEMA guidelines is advisable.

10. What happens if a company offering FDs goes bankrupt?

If a company goes bankrupt, FD holders become unsecured creditors. Recovery of funds depends on the liquidation process and available assets, often resulting in partial or no recovery.

Disclaimer

Corporate FDs vs Bank FDs: Which is Safer?