Mistakes To Avoid While Choosing Corporate Fixed Deposit in 2024

When it comes to choosing Corporate Fixed Deposits, steering clear of common mistakes is important for a secure financial journey. Understanding these mistakes can empower you to make informed decisions and safeguard your investments.

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What are Corporate FDs?

Corporate Fixed Deposits (FDs) are financial instruments offered by Non-Banking Financial Companies (NBFCs) or corporate entities to raise funds from the public. Unlike traditional bank FDs, which are issued by banks, corporate FDs are issued by private and public corporations. These deposits are a form of fixed-income investment where investors lend money to the issuing company for a specified period. In return, they receive a fixed interest rate on their investment.

Comparison Between
Fixed Deposits, Guaranteed Return Plans & Debt Mutual Fund
Guaranteed Return Plans, Fixed Deposits &
Debt Mutual Fund
Guaranteed Return Plans
Returns Before Tax
7.5% (TAX-FREE)
Returns After Tax
7.5%
Guaranteed Returns
Yes
Life Cover
Yes
Tax on Profit
Tax Free*
Risk
No Risk
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Still Better than FD’s and Debt Mutual Fund
Fixed Deposits
Returns Before Tax
7% (TAXABLE)
Returns After Tax
4.8%
Guaranteed Returns
Yes
Life Cover
No
Tax on Profit
Taxable
Risk
Low Risk
Debt Mutual Fund
Returns Before Tax
8% (TAXABLE)
Returns After Tax
5.5%
Guaranteed Returns
No
Life Cover
No
Tax on Profit
Taxable
Risk
High Risk
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They function similarly to bank FDs, but with some key differences:

  • Higher interest rates: Corporate FDs typically offer higher fixed deposit interest rates than bank FDs, making them a more attractive option for investors seeking higher returns. However, this comes with a higher risk.

  • Limited liquidity: Corporate FDs are generally less liquid than bank FDs. This means that it may be more difficult to sell them before maturity if you need access to your funds.

What are the Mistakes You Should Avoid?

When you're investing, it's important to avoid some common mistakes. Don't ignore credit ratings, be careful with high returns, think about when you might need your money, read all the details, and don't put all your money in one place. Let's explore these simple tips for smarter investing: 

  1. Ignoring Credit Ratings:

    One of the most important factors to consider while investing in corporate FDs is the credit rating of the issuing company. Credit ratings reflect the financial stability and creditworthiness of the company. Investing in FDs from companies with low credit ratings can pose a higher risk of default. Always check the credit rating assigned by reputed credit rating agencies to ensure the financial health of the company offering the FD.

  2. Chasing High Returns Without Considering Risks:

    While higher interest rates are attractive, it's important not to chase the highest returns without considering the associated risks. Companies offering exceptionally high interest rates may be compensating for higher risk. Evaluate the balance between returns and risks, and avoid being solely swayed by a seemingly lucrative interest rate. A moderate and sustainable return with lower risk might be a more prudent choice in the long run.

  3. Neglecting Liquidity Needs:

    Corporate FDs have a fixed tenure, and premature withdrawal may incur penalties. Before investing, carefully assess your liquidity needs and opt for a tenure that aligns with your financial goals. Avoid locking your money for an extended period if you require access to your money in the short term. Additionally, consider opting for FDs that offer periodic interest payouts if you rely on a regular income stream.

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  4. Ignoring Terms and Conditions:

    Investors often make the mistake of overlooking the terms and conditions associated with corporate FDs. Thoroughly read the offer document and terms of the FD to understand the terms and conditions, including the interest payment frequency, renewal options, and any penalties for premature withdrawal. Being aware of these details will prevent unpleasant surprises and help you make an informed decision.

    People Also Read: FD Calculator

  5. Focusing FD Investments in a Single Company:

    Diversification is an important thing in investing. Avoid putting all your corporate FD investments into a single company, even if it seems financially stable. Diversifying across multiple banks helps spread risk and protects your portfolio from the potential default of a single company. Create a well-balanced portfolio with corporate FDs from companies representing different sectors to mitigate concentration risk.

  6. Premature Closure of FDs:

    Premature closure of Fixed Deposits is a common mistake that investors make without fully understanding the implications. Corporate FDs often come with a lock-in period, and withdrawing funds before maturity can result in penalties and loss of interest earnings. Before opting for an FD, carefully assess your financial needs and choose a tenure that aligns with your goals. If there's a possibility of requiring funds before maturity, consider FDs with more flexible terms or those that allow partial withdrawals, albeit with some conditions. Being aware of the penalties and restrictions associated with premature closure is crucial for avoiding financial setbacks.

  7. Ignoring the Impact of Inflation:

    While corporate FDs offer a sense of security, it's essential to consider the impact of inflation on the real value of your returns. Inflation erodes the purchasing power of money over time, meaning that if the FD interest rate is not keeping pace with inflation, the actual value of your returns will decrease. Before finalising an investment, evaluate the interest rate in the context of prevailing inflation rates. Explore investment avenues that offer returns that outpace inflation, ensuring your money retains its value over the long term.

  8. Complete Dependence on FDs:

    Relying solely on corporate FDs for your investment portfolio can be a risky strategy. While FDs provide stability and fixed returns, they may not offer the same potential for wealth creation as other investment avenues. Diversification is key to building a strong portfolio, and putting all your funds into FDs exposes you to risk. Consider diversifying your investments across different asset classes, such as equities, ULIPs, mutual funds, and other fixed-income instruments. This not only helps in spreading risk but also enhances the overall potential for returns, providing a balanced approach to wealth creation.

FD interest rates India have fallen consistently over the last 12 years.
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Conclusion

Corporate FDs can be a valuable investment option for investors seeking higher returns than traditional bank FDs, but it's important to approach them with caution and avoid common pitfalls. By carefully evaluating your risk tolerance, conducting thorough research, and understanding the associated terms and conditions, you can make informed decisions and choose corporate FDs that align with your financial goals.

FAQs

  • Are corporate FDs safe?

    Not entirely. Unlike bank FDs, they are not insured by the government. This means you are exposed to credit risk if the issuing company defaults.
  • What is the most important factor to look for when investing in a corporate FD?

    Creditworthiness of the issuing company: Thoroughly research the company's financial health and credit rating to assess the risk involved.
  • What is the difference between bank FD and corporate FD?

    • Interest rate: Corporate FDs offer higher potential returns but come with greater risk.

    • Liquidity: Bank FDs are generally more liquid, allowing for easier access to funds.

    • Safety: Bank FDs are insured by the government, providing protection against defaults, unlike corporate FDs.

  • What are the features of corporate FD?

    • Fixed tenure and interest rate.

    • Flexible tenure options.

    • Regular interest payouts.

    • Premature withdrawal may be allowed with penalties.

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