Fixed Deposits are one of the safest investments that offer risk-free and guaranteed returns. Not limited to banks, Corporates also offer fixed deposits and are generally for a shorter period. But why should one choose Corporate fixed deposits over bank fixed deposits or vice versa? What is the difference, and why should one specifically invest in either of the Fixed Deposits?
A Corporate Fixed Deposit (FD) and a Bank FD are both investment instruments offering fixed returns, but they differ significantly in terms of issuer, risk, returns, and accessibility. This article will generate significant differences between both types of Fixed Deposits.
Corporate FD vs. Bank FD
The following sections will give you an overview of Corporate FD vs. Bank FD:
Accessibility
Corporate FDs may not be as easily accessible as Bank FDs. Investors need to research and approach individual companies or NBFCs offering these deposits.
Bank FDs are accessible through various channels, including branches, online banking, and mobile banking platforms. This accessibility makes it convenient for investors to open and manage FDs with banks.
Returns
Corporate FDs may offer higher interest rates compared to Bank FDs, reflecting the higher risk involved. Investors are compensated for the additional risk they undertake.
Bank FDs generally provide relatively lower interest rates compared to Corporate FDs. However, the trade-off is the enhanced safety and stability associated with investments in banks.
Risk Factor
Investing in Corporate FDs carries a higher risk compared to Bank FDs. The risk is associated with the financial stability of the company.
Bank FDs are low-risk investments. The risk is low because deposits with banks are often insured, providing an additional layer of security to depositors.
Issuer and Credibility
Corporate FDs are issued by private companies, NBFCs, or other non-banking entities. The credibility of a Corporate FD depends on the financial health and credit rating of the issuing company.
Bank FDs are issued by banks, which are highly regulated financial institutions. Banks are generally considered more stable and secure due to stringent regulatory oversight.
Liquidity
Corporate FDs may have limited liquidity. Premature withdrawal or liquidity before maturity may come with penalties or restrictions, depending on the terms and conditions.
Bank FDs often offer more flexibility in terms of premature withdrawal, with banks allowing depositors to break their FDs under certain conditions. However, this might also cause a penalty.
Tenure and Flexibility
Corporate FDs may provide more flexibility in terms of tenure options, allowing investors to choose durations that suit their financial goals.
Bank FDs typically offer various tenure options as well. Investors can choose from short-term to long-term deposits based on their preferences and financial planning.
Regulatory Oversight
Corporate FDs are subject to the regulations of the Reserve Bank of India (RBI) to some extent, but the degree of oversight might be less strengthened compared to banks.
Bank FDs are highly regulated by the RBI, ensuring a standardised and secure environment for depositors. Regulatory oversight adds more protection for investors.
Tax Implications
Interest earned from Corporate FDs is taxable, and investors need to consider the tax implications based on their income tax level.
Similar to Corporate FDs, the interest earned from Bank FDs is taxable. The tax liability depends on the investor's income and the tax regulations.
Bank FD vs Corporate FD: Which is better?
Choosing between a Bank FD and a Corporate FD depends on one's financial goals and risk tolerance. If you are someone who cannot tolerate risks, then opt for Bank FDs. If you are a professional investor and consider higher risks acceptable to get bigger returns, then choose corporate fixed deposits. Additionally, consider the tenure you are comfortable with. Bank FDs typically offer shorter tenures. On the other hand, Corporate FDs have more flexibility in this regard.
Conclusion
In the Corporate FD vs. Bank FD sector, the choice depends on the investor's risk tolerance, return expectations, and the importance of the safety of their investment. While Corporate FDs may offer higher returns, they come with increased risk, and investors should carefully evaluate the credibility of the issuing entity. On the other hand, Bank FDs provide a secure and regulated environment, making them a preferred choice for conservative investors prioritising safety over potentially higher returns. Diversification, thorough research, and understanding one's financial goals are key factors in making an informed decision between Corporate FDs and Bank FDs.
What is a Corporate Fixed Deposit (FD)?
A Corporate FD is a fixed deposit offered by non-banking financial companies (NBFCs) or corporate entities. Investors deposit a lump sum amount for a fixed tenure and receive interest rates.
How does a Corporate FD differ from a Bank FD?
A Corporate FD is issued by non-banking organisations, while a Bank FD is offered by banks. The key differences lie in the issuer, risk, and regulatory oversight.
What is the risk associated with corporate FDs?
Corporate FDs have a higher risk compared to Bank FDs. If the company faces financial difficulties, there may be a risk of fraud.
Are corporate FDs insured like bank FDs?
No, Corporate FDs are not insured. Bank FDs, on the other hand, are often insured up to a certain limit by bank authorities, providing an additional layer of security to depositors.
What factors should be considered before investing in a Corporate FD?
Before investing, consider the financial stability of the issuing company, the offered interest rates, the credibility of the company, and the tenure options.