Fixed deposits play an important role in the banking system of an economy. These are a major source of funds for banks after savings accounts. Banks provide steady returns on fixed deposits in line with RBI’s policy rates, such as the repo rate. With the third repo rate cut in this year bringing down the repo rate to just 5.75%, fixed deposit interest rates are also expected to be lowered. Therefore, locking in FDs at current high rates might be a wise thing to do.
However, the question is, should you choose to invest in a bank fixed deposit or a company fixed deposit ? While bank fixed deposits have been the hallmark of safety for decades, company fixed deposits have emerged as an instrument of choice for new-age investors.
But, with the recent news on DHFL stopping all fixed deposit withdrawals, investors are not sure about the safety of company fixed deposits. However, if you choose the right company FD, you can get guaranteed returns and ensure the highest safety of your investment amount. Read along to know how a company fixed deposit can outperform a bank fixed deposit.
Company FDs provide better interest rates than bank FDs. Company FD rates are usually 50-100 bps higher than any reputed bank FD. For senior citizens, the rates are further 25-40 bps higher than regular FD interest rates.
Interest rates for bank fixed deposits heavily depend on RBI’s repo rate movements. Banks cannot lend below the MCLR (Marginal Cost of Funds based Lending Rate) and they must achieve a certain ‘net interest income’ – i.e., the difference between lending and deposit rate. Hence interest rates on bank fixed deposits will always be lower than company FDs.
NBFCs and HFCs issue company fixed deposits in order to raise funds for the company. Companies use this money as capital in their business operations.
Credit ratings of company fixed deposits play an important role in showcasing the quality of the management and the debt servicing ability of the company. Credit rating agencies like CRISIL, Brickwork, and ICRA work towards establishing an accepted standard of ratings of 14 critical points as per the performance and debt servicing of these companies. ‘FAAA’ is the highest degree of safety, which indicates a timely payment of interest and principal. In the case of company fixed deposits, it is advisable to go with the highest rating of FAAA and AAA. You can pick as it is accredited with ICRA's MAAA /stable rating and CRISIS’s FAAA/stable rating.
Bank FDs provide a guarantee of INR 1 lakh only per depositor (as per the norms of Deposit Insurance and Credit Guarantee Corporation). However, with high rated company FDs, such as Bajaj Finance FD, you get assurance for guaranteed returns, irrespective of the deposit amount.
Liquidity – Company FDs are great for achieving immediate liquidity. You can take a loan against FD without breaking your FD and fulfill immediate requirements.
Market fluctuations –With a change in macro-economic indicators, banks might reduce rates immediately. However, company FDs will always continue to offer the highest interest rates, irrespective of market volatilities or sudden interest rate fluctuations by banks.
How to choose the right company fixed deposit?
Though company FDs always trump on the attraction of high-interest rates offered on them as compared to bank fixed deposits, it is important to do your due diligence before you decide to . Below are some criteria to evaluate company fixed deposits:
Company reputation- A credible company having a good record of profitability is a safe choice.
Payment history- Choose a company with a history of timely interest payments.
The credit rating of the company- As mentioned above, a company with a good credit rating by agencies like ICRA and CRISIL is ideal. The higher the rating, the safer your investment.
Interest-rate rack record- It’s a good idea to check the interest rates offered by the company in the last few years and pick the highest paying ones. Bajaj Finance Fixed Deposit offers attractive interest rates of up to 8.95%.
Important financial goals like buying a home or child's higher education can be met with planned laddering of company FDs. With Bajaj Finance FD, you can choose the tenor ranging from 36-60 months, thus making it easy for you to ladder multiple fixed deposits with subsequent maturity timelines.