How to choose the right fixed deposit (FD)2 min read . Updated: 14 Dec 2018, 10:56 AM IST
2018 saw bank fixed deposits (FDs) give company FDs a tough competition. Are you thinking of investing your money in bank FDs? Here's what you should look out for
Generally, company FDS give at least 150-200 basis points higher returns than bank fixed deposits. However, this year, fixed deposits (FDS), for instance, didn’t disappoint depositors. If you are one of those who park money in FDS, here is what you should know:
There are largely two types of FDs— bank FDs and company FDs. Company FDs are offered by deposit-taking corporates and like a bank FD, you deposit your money, and on maturity you get the money back with promised returns.
In 2018, the interest rate on corporate FDs rose in line with the bank FDs. “Corporate FDs have always been competitive against bank FDs. There is usually 1.5-2% difference between interest rates of well-rated corporate FDs and large bank FDs. This year, bank FD rates of large banks crossed 7%," said Srikanth Meenakshi, founder and chief operating officer, Fundsindia.com, an online platform for mutual funds, equity and company FDs.
However, the FD market has become more competitive thanks to small finance banks. “The fixed income market for retail investors has seen active competition from NCDs, companies, small finance banks and larger banks," said Meenakshi.
Both banks and companies are looking for depositor’s money.
“In case of AAA-rated FDs, in June 2018, a 24-month FD above ₹ 2 crore was 7.60% for cumulative and in December, it is 8.24%—an almost 60 bps hike in 6 months. We saw two rate hikes in 2018. Liquidity also got tighter in the market and, hence, these companies are giving better rates to depositors to get cash flow," said Devansh Mehta, debt market specialist, IIFL Securities Ltd.
However, small finance banks are giving better rates than AAA-rated company FDS. “If you look at all the 10 small finance bank licensee, eight are microfinance companies whose primary business before becoming a bank was microfinance. Microfinance companies have to borrow money from banks to do business and cost of fund is around 11-12%. Now that we can take deposits, it makes sense to give 50-60bps higher rate of interest to attract depositors because it is anyway reducing our dependence on banks," said Manish Kumar Raj, business head-branch banking, Ujjivan Small Finance Bank Ltd. Hence, you will find FD rates are better at small finance banks as compared to large private and public sector banks for a couple of years, said Raj.
What should you do?
If you are planning to invest in FDs don’t just look at the interest rate. When it comes to bank FDs, you should consider both interest rate and the ease of depositing your money. Also, in case of bank FDs, you get an insurance cover up to ₹ 1 lakh of your deposit. This means that you are protected up to ₹ 1 lakh per deposit.
If you are planning to opt for company fixed deposits, you need to further due diligence. There have been multiple cases where companies have defaulted on deposit and have not paid back the depositor. Hence, if you are planning to invest your money, firstly, look at the credit rating of the fixed deposit. AAA-rated company FDs can be considered safe.
Also check the fundamentals of the company and what the company plans to do with your money. In case of taxation, except for five-year tax saving FDs, all other FDs are taxable on your income slab rate. Hence, if you are in the 30% tax bracket, the interest you earn from FD will be taxed at the same slab. FDs may sound safe, but they are not always.