Corporate FDs: Avoid these 5 mistakes and make your money sing

FDs offered by non-banking financial companies (NBFCs) and other corporate entities are called corporate fixed deposits.

Fixed deposits (FDs) are savings instruments that provide higher interest rates compared to traditional savings accounts. These instruments are also called term deposits, as the investor makes a one-time investment and receives the redemption proceeds after a specified term. The investor has the option of receiving the interest at regular intervals, or as a lump sum during redemption.

FDs offered by non-banking financial companies (NBFCs) and other corporate entities are called corporate fixed deposits. While the interest rate on corporate FDs are a tad higher than bank FDs, the maximum allowable tenure is lower in the former.

Investing in a corporate FD is an excellent strategy as it offers the advantage of guaranteed returns at rates that are slightly higher than bank FDs.

However, investing money in a corporate FD blindly, or based on hearsay, is ill-advised. Here, we have listed some common mistakes people make, and ways to avoid making them.

Failure to evaluate your goals and do your home work

Many people start investing  arbitrarily. They come across an option and invest in it based on an acquaintance’s advice, without  doing their homework. You ought to plan your investments after listing down your financial goals. That way, your investments will leverage your savings fully. Otherwise, it may become a hit-or-miss affair where, if you are unlucky, your savings might prove insufficient for achieving your goals.

After firming up your financial goals, study the various corporate FDs in the market, and compare them on parameters such as tenor, interest rates, etc., before you narrow down on an option. Also, read investment guides or books that will broaden your outlook and deepen your knowledge. Investing in a corporate FD without examining its features and suitability may leave you invested in a sub-optimal option.

Also read | Diversify your fixed investments with Moneycontrol platform

Not considering the ratings

While conducting your research, pay attention to the ratings. Top credit rating agencies in India, including CARE, ICRA, and CRISIL rate company fixed deposits. These ratings help you make a more informed decision based on the level of risk. Wherever possible, stay away from lower-rated / unrated corporates, even if they offer high interest rates as they may be fraught with risk.

Also read | Invest in FDs through Moneycontrol and earn up to 8.5 % p.a.

Premature closure of FDs

If you close your FDs prematurely, you stand to lose some of the interest and may also have to bear a penalty, as the corporate loses the opportunity to utilise the funds for the promised period. Therefore, choose the tenor carefully. Factor in your requirement for funds in the near future and pick a tenure that suits you. Additionally, make provisions for medical insurance, so that there is a lesser probability of needing money at short notice. If you are closing down your corporate FD to migrate to more attractive options, the penalty levied on the premature closure will defeat the advantage. Therefore, it is advisable to stay invested in the FD till the end of the term.

You can now Invest in Fixed Deposits on Moneycontrol app.

Neglecting the impact of inflation 

Inflation erodes the value of money over time, and relying solely on the interest earned from an FD will not be sufficient to outpace inflation. To combat this, it is crucial that we account for inflation. Thus, it is wise to lock in your investment when interest rates are at their peak.

Also read | FD rates: Public sector banks that offer up to 7.25% interest on 3-year deposits

Complete dependence on FDs

The relatively higher interest on corporate FDs may tempt investors to invest a substantial portion of their  savings  in it. The strategy may not allow you to leverage your savings optimally as you may not obtain the benefits provided by other debt and equity instruments. A better strategy would be to create a well-diversified investment portfolio, as different instruments can provide the investor with multiple benefits that offset the disadvantages of each instrument.

Avoid these mistakes while investing in corporate FDs, and see your money work hard to help you achieve your financial goals.