Should you invest in corporate fixed deposits?

Investors have some misunderstandings regarding corporate fixed deposits. They think that these are equivalent to the regular bank fixed deposits and therefore are safe. But there are some factors one need to consider before opting for investment in corporate fixed deposits.

Corporate fixed deposits are issued by private and public companies. The working of corporate fixed deposits is the same as bank fixed deposits. There are two options one may opt for a Cumulative option, wherein interest earned also gets added to the deposits and another option is the non-cumulative option, wherein interest would be paid after every fixed duration. These deposits offer quite higher returns compared to bank fixed deposits. Where the bank fixed deposits rates are around 6.5 to 7.0 per cent, corporate fixed deposits provide returns of around 8 to 14 per cent. It would be wise to ask the question as to why is the company providing such a high rate of return?

Companies need money to fund new projects or for expansion. So companies can either raise money by taking a loan from the banks or raise money by other means but most of these options can prove to be a costly bet for the company. Hence, companies come up with their corporate fixed deposits wherein retail investors can invest in those deposits and earn higher returns.

But it is very crucial for an investor to understand that higher the return, higher the risk and vice versa. So, it is important to check for what reason is the company raising funds via deposits and is it actually viable.

Usually, it is good to check the credit ratings of such companies. Major credit rating agencies like Crisil, ICRA, rate these companies. So AAA-rated corporate fixed deposits would be a safe bet but may provide less rate of returns.