Four tricks to make the best use of corporate fixed deposits

If the amount you have in FDs is small, then no need to complicate things. Just keep it in a simple bank FD.

One of the safest and most popular savings instruments in India is Bank Fixed Deposits (FDs). You deposit the money for a fixed period and in return, you get interest income at a fixed rate.

While the current high interest rate environment has made FDs quite attractive, is there a way to further ‘optimise’ your FD portfolio? Note: I have deliberately not used the word ‘maximise’ and instead chosen ‘optimise’. And this will be clear in our discussion below.

Unpacking high interest by corporate deposits

For more than 1-year tenure, the bank deposit rates are around 7-8 percent. But there are several corporate fixed deposits offering even higher 8-9 percent interest rates. So naturally, there is a temptation to look for return maximisation.

Now first things first. If you are a simple, conservative saver, then you should stick with simple bank FDs. That too with either the RBI identified Systemically Important Banks (SIBs) or a few of the larger, solid banks. Don’t be tempted into high rates offered by riskier cooperative entities, etc.

Others who are open to a little bit of extra-but-manageable risk taking can consider diversifying their FD portfolio to some extent.

You can now Invest in Fixed Deposits on the Moneycontrol app

How can they do that? Let’s see.

But first, let’s understand why some corporate entities or NBFCs offer higher interest rates than banks. NBFCs, like banks, need money to lend. However, their options to raise funds are limited as they are not allowed (like banks) to offer lower rates via savings and current accounts. This is a primary reason among a few others for NBFCs to offer slightly higher rates than banks to get deposit money (which they will lend further).

So, while NBFC as a concept may seem riskier than a bank, the reality is that some of the large deposit-taking NBFCs are quite solid. Not risk-free but given the regulations in place, they are still well managed and worth considering.

Also read: MC explains: Why smaller FDs work better than one large FD

Tricks to add corporate deposits

So here is how one can diversify their FD portfolio. Note that this is just a general suggestion and not specific advice applicable to everyone:

How big is your investment?: If the amount you have in FDs is small, then no need to complicate things. Just keep it in a simple bank FD. The reason is that even if you get an additional 1-1.5 percent from corporate deposits, it will not have too big an interest benefit given the small principal size at stake. Also, the DICGC insurance covers all the bank deposits for small depositors who keep up to Rs 5 lakh in banks.

Emergency funds: Now the next thing I suggest is to also keep your emergency fund money in bank FDs and not other deposits. This is assuming it is not parked in liquid funds or something similar. An emergency fund is a pot of money that is for your non-negotiable expenses like food, rent, insurance premiums, children’s school fees and all those expenses you just cannot afford to miss if you were to lose your job or income stops.

Assured, not market-linked, returns: Those who have larger amounts in bank FDs and, for some reason, do not want to venture into debt funds, should spread the money as follows: put 65-75 percent in bank FDs. That too in larger, stable banks. The remaining 30 percent or so can be invested in corporate /commercial /NBFC deposits offering higher rates. But don’t get adventurous when doing that. Don’t just blindly run after the highest rate on offer. Evaluate the creditworthiness and stability of the deposit taking entity and always go for those with the highest ratings. This is your best bet.

Laddering helps: Also, while making deposits try to create a ladder of deposits across different maturity periods. This helps in managing periodic liquidity requirements and also frees up funds to reinvest at the then prevailing interest rates and manage the interest rate risk.

As an example, let’s say you have Rs 25 lakh that you want to keep in FDs. So maybe, keep Rs 15-20 lakh in bank FDs at about 7 percent, and the rest can be in other high-rated corporate/commercial deposits offering 8-9 percent. That way, your returns would be better optimised.