Fixed Deposits: Invest in short-term corporate FDs

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With rising interest rates, investors may look to fixed corporate deposits for higher returns than bank deposits. However, they should look for safety of capital and invest in triple-A rated companies and preferably aim for short tenures now.

Look at the credit score
The main criterion for investing in a corporate deposit is the credit rating of the deposit/company. While lower risk companies will have a higher or better rating, these deposits will offer a lower interest rate. On the other hand, since high-risk companies with low ratings need to attract money from depositors, they will offer a higher interest rate. Thus, the risk associated here is credit risk and investors should refer to Crisil, ICRA, CARE ratings to compare the quality of the paper. For example, Crisil FAAA or ICRA MAAA are safer options.

In fact, AAA ratings will give you lower returns than lower-rated deposits. But your money is the safest here and you will get your principal and interest on time. Adhil Shetty, CEO of Bankbazaar.com, says it is advisable to avoid deposits rated below AA. “Before depositing your money, you should also check company and industry fundamentals. Calibrate your risk and return expectations. The higher the returns, the higher the risks. Ideally, your yields from corporate FDs should be 100 to 150 basis points higher than those from bank FDs,” he says.

Also Read: Max Life Insurance Enters Pension Fund Management Business; his arm gets PFRDA license

Opt for a shorter term now
The Reserve Bank of India is likely to opt for one or two rounds of rate hikes as inflation is not yet under control. In such a situation, investors should aim for short terms and reinvest for higher returns as deposits mature. “Once interest rates have peaked and begin to show signs of decreasing or decreasing, fixed deposits could then be locked in for five years and beyond. For practical purposes, currently, FD warrants can be maintained at 12 months,” says Chaitali Dutta, personal finance wellness expert and founder of AZUKE.

Tax structure on business deposits
Interest earned on business deposits is taxable under “income from other sources” and taxed at the applicable slab rate. Additionally, if interest earned in a financial year from a corporate deposit exceeds Rs 5,000, TDS will be deducted at 10% of the amount of interest.

In a corporate deposit, income is accrued annually, and TDS is deducted and deposited annually even if the amount is receivable at maturity. In such cases, the tax payable is spread evenly over the life of the deposit. Neeraj Agarwala, Partner, Nangia Andersen India, says that when the person’s total income is less than the maximum non-taxable amount, the person can submit Form 15G (Form 15H in case of elderly) to the company for non-deduction of TDS.

Diversify your deposits
Since diversification reduces risk to your investments, the FD portfolio should be spread across banks and various companies and among mandates. Hold deposits of various maturities, ranging from 180 days to five years and more. “For parking funds where you need them within a few days/months, 15 or 45 day bank deposits can be used. In the case of NRIs, holding deposits in currencies other than INR can also Registering a proxy for all your deposits ensures a smooth transition of assets in the event of unforeseen circumstances,” says Dutta.

Investors should do their due diligence before investing in them. Sushil Jain, CEO of PersonalCFO.in, a wealth management company, says that since corporate deposits are unsecured deposits, they are not recommended for a conservative investor. “Even the Deposit Insurance and Credit Guarantee Corporation, where deposits with all banks are covered by insurance cover of Rs 5 lakh, does not cover corporate deposits,” he warns.

You can choose a combination of big banks, small banks, and AAA-rated companies to get better average returns. Also keep an eye on the company and its financial health to minimize investment risks.

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