You have a little money saved and want to grow it without losing it. Fixed Deposits (FDs) are another attractive option, but selecting between bank and corporate FDs can radically alter your returns.
Thus, understanding how these two options differ is essential for making informed decisions.
Which is better, Bank FD or Corporate FD?
Here are five differences to keep in mind while deciding between a bank and a corporate FD.
Interest rate
Bank Fixed Deposit / FD Rates: (between 3% and 8%) The rate depends on the amount you invest, maturity tenure, and age. A higher rate applies to every investment and tenure slab for senior citizens.
Corporate FD rates can reach up to 10%. However, be aware that, generally, in corporate FDs, companies that promise higher interest rates to lure investors may not be sturdy at all and can end up defaulting on payments.
Tip: Invest in a corporate FD. Before you make a decision, properly analyse the issuing company’s financials.
Risk and safety:
Risk and safety DICGC (Deposit Insurance and Credit Guarantee Corporation), up to ₹5 lakh per depositor anyone in the case of a Savings or Fixed Deposit Account; the Last thing to keep in mind would be you will get back its complete investment if the bank is closed and on these worst situation upto ₹5-lakh. On the contrary, corporate FDs are a little risky. When the issuing company defaults, you will only get your money back. Just remember: Read the credit rating of corporate FDs by any recognised institution (e.g. CRISIL). The better the rating of a corporate bond, the lesser the risk it carries.
Liquidity and tenure
Liquidity and tenure FDs in banks have leeway to invest for flexible tenures. A tenure can be accessed from as low as 7 days to 10 years in case of liquidity. For liquidity, there is an option of premature withdrawal, but it includes a withdrawal charge (charged from the value of your investment). Corporate FDs are almost identical to Bank FD’s lock-in periods and tenures. Remember: Take a laddering approach and start dividing up your finances across different FD Tenure after assessing your actual position on funds. Acceptable to various categories of investors.
Bank FDs — Suitable for conservative investors who seek safety, but just in case, not for higher risk-taking. However, if you want some spice in your life but not the highly volatile stock market, you should opt for corporate FDs with good credit ratings.
Tax benefits
Tax benefit Interest of Bank and Corporate FDs are clubbed under “Income from other sources,” meaning they will be part of your total taxable income and taxed as per your income tax slab. Some of the Bank FDs are tax saving instruments under section 80C, which allows deductions of up to ₹15000 for a term of 5 years. For corporate FDs, however, tax benefit is a rare thing. In that sense, Bank FDs have always been a more tax-savvy option for investors.
Conclusion
Ultimately, bank FD and corporate FD choices aren’t so much based on the FD rate carry. The answer is based on your personal financial situation and goals. Though bank FDs are a safer product for Conservative Investors, they also provide stability. On the other hand, corporate FDs offer higher returns but higher risk. Now, evaluating your tolerance for risk and financial goals, along with the detailed terms of each FD, helps you arrive at the right investment strategy.
