Things to Know Before Investing in Corporate FD

Corporate fixed deposit is an investment instrument that allows you to invest in company shares. If you are a first-time investor, a corporate FD may be a good choice. 

Company Fixed Deposits or Corporate FDs are term deposits held over a fixed period for a fixed interest rate. Several financial and non-banking financial companies offer corporate FDs.

Fixed deposits have always been a lucrative investment option for making decent returns in the long term. Most banks offer specific corporate fixed deposit schemes which are readily available to the masses. A fixed deposit scheme offers stable returns at minimal risk. But before you invest, make sure to consider the fundamentals of the company.

Below are certain things to keep in mind before making an investment in a fixed deposit scheme.

Tenure

The interest rate on a fixed deposit varies from bank to bank along with the tenure. Different banks offer varying tenures from a few months to a few years. Before making a deposit, ensure you identify all of the costs and penalties. 

Tenure of fixed deposit is an important consideration when choosing a corporate FD to invest in. The longest term is generally 10 years. This type of investment is suitable for those who are looking to grow their money over the long-term. This type of investment is considered a safe, low-risk investment and can earn a high return.

Tax Deducted At Source

When you are investing in a fixed deposit scheme, you have to consider the Tax Deducted At Source (TDS) that will be levied on the interest and principal. 

The current threshold for TDS is Rs 5,000. If your interest income exceeds this, you must pay 7.5% tax at source. You can reduce the amount of TDS by splitting your investment across several banks. In other words, if you have an FD earning ten percent interest, you should open accounts with three banks and divide the amount evenly between them.

Offer for Senior Citizens

Availing of the Senior Citizen Offer, you need to be a resident of India and above 60 years of age. You will need one document to prove your eligibility. You can also open an NRO or NRE account to avail of additional benefits under the scheme. Be sure to do thorough market research. In addition to checking interest rates, you should also look for fees, penalties, and tenure. Comprehensive market research is essential to choosing the best-fixed deposit instrument.

To benefit from the Senior Citizen Offer, you need to ensure that you open an account for a minimum of 1 year. However, if you are opening an FD for a shorter period, you might not be eligible for the higher interest rates.

Penalty for Premature Withdrawal

If you decide to withdraw your money before the fixed maturity date, you will have to pay a premature withdrawal penalty to the bank. This penalty can be anywhere between 0.5% and 1%, depending on the bank. Also, if you withdraw your money before the term is complete, you will lose the compounding effect that can have made your money grow.

Minimum Account Balance

FDs generally require a minimum amount of money to open and must be held for a minimum of one year. You should also know that the interest earned from these investments is taxable. You should check if you’ll be charged a penalty if you withdraw your money early.

Frequency of Interest Payments

There are several types of fixed deposits, all of which can be advantageous for you. 

Non-cumulative deposits pay interest on a regular basis. This type of deposit can have monthly, quarterly, or half-yearly payments. Interest rates vary, and they may be as high as 7%. Interest on non-cumulative deposits is taxable at the time of receipt. Fixed deposit tenures can range from six months to five years. Non-cumulative fixed deposits are generally preferable for individuals who need a steady source of income to fund their savings.

Rate of Interest

Probably the most crucial point to keep in mind is the rate of interest while making an investment choice. One of the significant risks of fixed deposits is the risk of interest rate fluctuations. When investors withdraw their money early, this can put a company into a cash crunch. In such a case, it may not be possible to repay the maturity amount. An example of this risk was seen in the recent case of Elder Pharma, which failed to repay its principal and interest.

When choosing a fixed deposit scheme, it’s crucial to compare the interest rate offered by banks to those offered by companies. Corporate fixed deposits offer higher interest rates, but they’re riskier. The security of a bank FD has limited to Rs 1 lakh, while a company’s FD is not secured. Even the best corporate FDs are risky investments.

In conclusion

Fixed deposits are available from most banks. Potential investors can calculate their monthly interest payout using a fixed deposit calculator. Just input the amount of money you want to deposit and select a monthly interest payout frequency. The calculator will then compute the monthly interest payout based on current interest rates at the bank.