With rising interest rates, investors can look at corporate fixed deposits to earn higher returns than bank deposits. However, they should look at the safety of capital and invest in triple-A rated companies and, preferably, target short tenures now.
Look at credit rating
The foremost criteria for investing in a corporate deposit is the credit rating on the deposit/corporate. While lower risk corporates will have a higher or better rating, these deposits will offer a lower interest rate. On the other hand, as high-risk corporates having low ratings need to attract money from the depositors, they will offer a higher interest rate. So, the risk associated here is the credit risk and investors must refer to Crisil, ICRA, CARE ratings to compare the quality of the paper. For instance, Crisil FAAA or ICRA MAAA are safer options.
In fact, AAA ratings will give you lower returns than lower-rated deposits. But your money is the safest here and you will get your principal and interest on time. Adhil Shetty, CEO, Bankbazaar.com, says it is advisable to avoid deposits that are rated below AA. “Before depositing your money, you must also check the fundamentals of the company and the sector. Calibrate your risk and return expectations. The higher the returns, the higher the risks. Ideally, your returns from corporate FDs should be 100-150 basis points higher than bank FDs,” he says.
Go for shorter tenure now
The Reserve Bank of India is likely to go for another round or two of rate hikes as inflation is not yet tamed. In such a situation, investors should target short tenures and reinvest for higher returns when the deposits mature. “Once the interest rates peak out and start showing signs of tapering off or reducing, at that point the fixed deposits could be locked in for five years and above. For practical purposes, currently the FD tenures may be kept at 12 months,” says Chaitali Dutta, a personal finance wellness expert and founder of AZUKE.
Tax structure on corporate deposits
Interest earned on corporate deposits is taxable under the head “income from other sources” and taxed at applicable slab rate. Further, if the interest earned in a financial year from a corporate deposit exceeds Rs 5,000, TDS will be deducted at 10% on the amount of interest.
In a corporate deposit the income is accrued annually, and TDS is deducted and deposited annually even though the amount is receivable on maturity. In such cases, the tax liability is evenly distributed over the life of the deposit. Neeraj Agarwala, partner, Nangia Andersen India, says where the total income of the person is less than the maximum amount not chargeable to tax, the person may submit Form 15G (Form 15H in case of senior citizens) to the corporate for non-deduction of TDS.
Diversify your deposits
As diversification lowers the risk to your investments, the FD portfolio should be spread across banks and various corporates and across tenures. Hold deposits of various maturities, ranging from 180 days to five-years plus. “For parking of funds where you need them within a few days/ months, the 15 or 45 days bank deposits may be utilised. In case of NRIs, holding deposits in currencies other than INR may also be useful. Registering a nominee for all your deposits ensures smooth transition of assets in case of an unforeseen circumstance,” says Dutta.
Investors must do proper due diligence before investing in them. Sushil Jain, CEO, PersonalCFO.in, a wealth management firm, says, as corporate deposits are unsecured deposits, they are not advisable for a conservative investor. “Even the Deposit Insurance and Credit Guarantee Corporation, where deposits with all banks are covered under insurance cover of Rs 5 lakh, does not cover corporate deposits,” he cautions.
You can choose a mix of large banks, small banks, and AAA-rated companies to get better average returns. Also, keep an eye on the company and its financial health to minimise the risks to investment.