What is Fixed deposits?

Fixed deposits (FDs) are one of the most popular investment options in India, with 56% of household financial assets placed in bank FDs, according to the RBI. They provide a fixed return over a chosen tenure. Apart from banks, non-banking financial companies (NBFCs) also offer corporate FDs, which usually give higher interest rates but involve greater risk compared to bank FDs.

Bank FD versus Corporate FD

Rate of return:

Corporate FDs generally offer higher rates (e.g., SBI FD ~6.1% vs Bajaj Finance ~7%). Rates depend on the company's credit rating.

Tenure:

Bank FDs range from 7 days to 10 years, while corporate FDs are usually 1 to 6 years. For very long durations, only banks provide options.

Lock-in period:

Bank FDs have no lock-in; corporate FDs often have a 3-month lock-in.

Premature withdrawals:

Allowed in both, but banks have lower penalties and better liquidity.

Taxation:

Interest from both types is added to income and taxed per slab.

Points to consider for investing in corporate FDs

Interest rate:

Interest rates differ across NBFCs; higher returns often come with higher risk.

Credit risk:

Credit risk is crucial investors must check company ratings to ensure safety of capital and returns.

Tenures:

Tenure options vary with higher rates for longer terms.

Mode of interest pay-out:

Interest payout can be periodic (monthly, quarterly, yearly) or cumulative, where returns compound.