Companies mostly beat large banks on FD returns, face competition from SFBs

However, corporate deposits are generally riskier than those offered by large bans; debt funds offer attractive returns in above 3-year tenure

Returns offered by corporate fixed deposits (FDs) have moved up during the ongoing rate-hike cycle in tandem with the returns on other fixed-income instruments. Before investing in them, compare them with other fixed-income instruments on return, safety, and taxation.

Return

Here, the picture is mixed across tenures. AAA-rated corporate FDs largely score over large public and private sector banks’ deposits. There are some exceptions though. In the one-year tenure, Bandhan Bank’s 7 per cent return is more attractive. In the three-year tenure, DCB Bank’s return of 7.5 per cent is comparable to the best rates offered by AAA-rated corporate FDs.

In the one-year tenure, Utkarsh Small Finance Bank (SFB), which is offering 7.15 per cent, scores over both large banks and corporate FDs. Jana SFB shines in the three-year tenure (7.55 per cent).

Banks have announced special FD rates. Here, Bank of India’s 777-day Star Super Triple Seven FD (7.25 per cent) and Bandhan Bank’s 600-day FD (7.5 per cent) are attractive.      

Safety

Large commercial banks are reasonably safe with public-sector banks scoring over private-sector banks. Corporate FDs carry higher risk than bank FDs.

“Conservative investors should stick to AAA-rated corporate FDs. Also limit your investments to renowned promoter names that offer comfort,” says Deepesh Raghaw, founder, PersonalFinancePlan, a Securities and Exchange Board of India (Sebi)-registered investment advisor (RIA). Applying these criteria would limit the field to names like HDFC, ICICI Home Finance, LIC Housing Finance and Bajaj Finance.

SFBs are also a reasonably safe bet since the RBI is unlikely to let them fail. SFB deposits of up to Rs 5 lakh are covered by the Deposit Insurance and Credit Guarantee Corporation (DICGC). However, their loan asset quality is riskier. Since these banks have existed for only around five-six years, they have limited experience of handling economic downturns.

Adds Raghaw: “In my view, the top tier players (HDFC, ICICI Home Finance, etc. mentioned above) have lower risk than SFBs. Beyond that, investors should be cautious and consider on a case-by-case basis. SFBs will likely have lower risk than other non-banking finance companies (that is, barring the best ones).”  

Taxation

On taxation, interest income from all FDs gets added to the taxpayer’s income and is taxed at slab rate.  

Consider debt fund option

Investors looking for higher returns should also consider safe debt fund categories that invest preferably in AAA-rated bonds. They may consider money market, banking & PSU debt, and select corporate bond funds. Yield to maturity of debt funds have turned attractive.

Dilshad Billimoria, board member, Association of Registered Investment Advisors (ARIA) says, "Debt funds provide diversification, liquidity and tax benefits.”

To lock in returns, go for target maturity funds (TMFs). “With interest rates going up today a well carved investment area is SDL index bond funds which are offering yields of 7-7.25 per cent on a three-five-year maturity," says Billimoria.

On investments of above three years, debt funds score over corporate FDs of similar tenure on a post-tax basis due to the indexation benefit.    

What you should do

Investors having higher risk appetite may consider corporate FDs after comparing rates for the tenure they are interested in. Gaurav Aggarwal, senior director, Paisabazaar says, "Investors having higher risk appetite and looking for higher returns than bank FDs but with higher income certainty than in market-linked fixed income instruments can opt for corporate FDs.”

Sanjeev Govila, a Sebi-registered investment advisor (RIA) and chief executive officer, Hum Fauji Initiatives, says, "They charge lower penalty than bank FDs in case of premature withdrawal.”

If you invest in a corporate FD, monitor its credit rating and financials. Ranjit Dani, Nagpur-based certified financial planner (CFP) says, "Retail investors may not find it easy to monitor credit ratings and balance sheets.”

On the fixed-income side, avoid chasing returns blindly; pay heed to safety also. “Don’t put more than 50 per cent of your total FD portfolio in corporate FDs and SFBs. Keep at least half in safe larger banks,” says Raghaw.

Maneet Pal Singh, partner, I.P. Pasricha & Co says, "Diversify across companies to minimise risk."