Do Corporate FD's make sense?
Here’s why company fixed deposits (FDs) are very popular investment instruments. They offer risk-averse investors better returns, usually in the upper range of 1-3% than that offered by typical bank FDs.
A company FD is a term deposit that is held over a fixed period and at a fixed rate of interest, with maturities ranging from a few months to a few years. These deposits are offered by both financial and non-banking financial companies (NBFCs) and interest is either paid monthly, quarterly, half-yearly, or yearly.
The need to beat rising inflation while sticking to low-risk investment options has become a challenge for investors recently. Bank fixed deposits were a good option in the past, but offer no such relief in the current scenario.
On the other hand, company or corporate fixed deposits can offer up to 8% returns per annum, albeit at a higher risk. But are these instruments worth the risk?
How do they differ from each other?
A key difference between bank FDs and company FDs is safety. As per the Deposit Insurance and Credit Guarantee Corporation (DICGC) Act, each depositor in a bank is insured up to a maximum of ₹5 lakh for both principal and interest amount held. However, this safety net is not available with company FDs, where investors can lose their full capital if the company defaults.
Taxation wise, interest earned above ₹5,000 in a year in company FDs is taxable as per investors' income tax slab. The company will also deduct tax deducted at source (TDS) at 10% on the interest earned for resident Indians.
Should you invest?
Taxation wise, interest earned above ₹5,000 in a year in company FDs is taxable as per investors' income tax slab. The company will also deduct tax deducted at source (TDS) at 10% on the interest earned for resident Indians.
For somebody in the higher tax slab, company FDs may not necessarily be a great instrument. Debt mutual funds are better in this case as they will give better tax-adjusted returns.
Cheers!
(Oh and if you've subscribed newly and want to learn fundamental investing for free, you can do it here: Twitter!)
Mid-Week Wisdom:
"There was a time when a fool and his money were soon parted, but now it happens to everybody."
- Adlai Stevenson
If you want to know about something related to finance, or have any queries:
Please drop us an email: advisoira@gmail.com
Create your financial plan in less than 3000 Rupees: Visit Website