Companies require money for their growth and expansion. They can borrow money from banks which charge them a high rate of interest. There is another method through which Companies can raise money and that is a corporate fixed deposit.
What is a corporate fixed deposit?
You can make a deposit with a Company in a similar way to a bank fixed deposit. The Company pays a slightly higher rate of interest on deposits made with them than a bank fixed deposit for a fixed time period.
How safe are corporate fixed deposits?
Corporate fixed deposits are riskier than bank fixed deposits and do not enjoy the safety bank deposits provide. Your money in a bank FD is guaranteed by the Deposit insurance and credit guarantee Corporation up to INR 1 Lakh in the bank.
The deposits you make in a corporate fixed deposit are unsecure in nature. The Company could default on the interest payments to you, or worse not return your principal amount.
You need to be assured that your money is in safe hands.
How do you make sure your money invested in the corporate fixed deposit is safe?
You need to check the credit rating of the Company deposits before investing your hard earned money with them.Credit rating for Companies accepting deposits is not compulsory and even if done Companies may refuse to disclose the rating.
However if a Company were to get a good rating it is likely to disclose it.
Rating agencies like Crisil rate corporate fixed deposits. If the corporate fixed deposit has a rating of FAAA you can be rest assured your money is safe.
This is the highest rating and guarantees that the Company will pay interest on the money deposited with them and return the principal amount you deposit with them.
If a Company has a high rating it is easier for it to borrow money from you as well as other people and it will offer a lesser rate of interest than say a lower rated corporate fixed deposit.
FAA rating are also highly safe but not as safe as FAAA rated corporate fixed deposits and offer you a higher rate of interest to make up for the additional risk.
FA rated Company deposits are adequately safe. If the corporate fixed deposit has a rating of FB or FC you need to be very careful even if the Company pays you a high rate of interest on the deposits you make with them.
How liquid are corporate fixed deposits?
You can make a premature withdrawal from a bank fixed deposit with a small penalty.If you withdraw your money from a Company FD within 6 months after you deposit your money no interest is paid to you.If you withdraw your money from the Company FD within 6-12 months after the deposit date you will get a lesser interest say 2-3% lesser than the actual interest rate promised.
The final decision to avail a corporate fixed deposit is in your hands. You definitely need to do your research before you invest in a corporate fixed deposit.
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