Assured returns and high interest rates are two features which many investors look for in an investment avenue. Corporate fixed deposit as an investment option caters to this category of investors. Though similar to bank fixed deposits in nature, it has certain differences which need to be understood and kept in mind before investing in this instrument.
Corporate fixed deposits, or company fixed deposits as they are also called, have been present in the Indian market for a long time now. Corporates have used this instrument to raise funds as and when they required. For some years though, its use had become scarce as companies found it more convenient to raise money from the share market. But, in the recent years corporates have again started to issue company fixed deposits owing to the economic slowdown and the increased difficultly faced by them to raise money through the share markets.
Features of Company FDs
- The interest rates offered on Company FDs are generally higher than those offered on bank fixed deposits.
- The interest income is provided on a fixed periodic basis such as monthly, quarterly, half yearly or annually.
- The company fixed deposits have different maturity periods ranging from six months to seven years.
- Corporate FDs provide the investors an opportunity to choose a nominee for the deposit.
- Company FDs are riskier as compared to bank FDs as the returns on the former are only assumed. Unlike bank fixed deposits, the interests paid on corporate fixed deposits are not fixed and can vary depending upon the financial conditions of the company. For example, if a corporate FD carries an interest rate of 9 percent, the actual rates received can also be 5 percent.
Another thing to note is that if the firm faces difficult financial situation, the investors will be paid interest only after all the secured creditors have been paid off. So, the investors have a risk of losing money.