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Corporate FD

What are Corporate Fixed Deposits (CFDs)?

The deposit placed by the investors with companies for a fixed term & carrying a predefined rate of interest is called Corporate Fixed Deposit. These are majorly issued by Non-Banking Financial Corporations (NBFCs) and Housing Finance Companies (HFCs).

A common misconception is that company fixed deposits are not wise investment choices when the deposit rates offered by the banking institutions are high. On the contrary, wisely chosen company fixed deposit products should always have a place in an investor's debt portfolio.

The reason for this is simple - interest rates should not be considered in isolation. Rather, they should be considered in relation to the prevailing inflation rate or the rate at which the rupee is losing value in the market. An astute investor will observe two things - one, whatever be the ongoing annual inflation rate is, the deposit rates offered by institutions are a notch (a couple of percentage points) lower than that and two, the average company deposit offers a slightly better rate than the bank fixed deposit for a comparable term. Putting the two together, an investor will always know that the company fixed deposit gives an interest rate that is closer to the current rate of inflation at a point in time compared to a similar bank FD product.

Of course, the key is, as in all things in life, moderation. The company deposits give a slightly higher interest rate because there is a slightly higher risk associated with them. The credit risk associated with a company fixed deposit should be factored into while making a decision on where to invest.

The simple thumb rules to keep in mind are the following:

• Spread your investments - an investor has a choice between PSU banks, private banks and companies when it comes to deposit options. Simply, divide your deposit portfolio into three equal parts for these categories.
• Choose your companies wisely - no un-rated companies regardless of how high a rate they offer, and preferably chose companies that are part of a larger group so the risk is mitigated. And finally,
• Choose the company deposits for the part of the portfolio that has the shortest tenure - say 1-2 years. With this approach, an investor will have the potential to make a good risk-adjusted return from their deposit portfolio