BackKnow these three risks before investing in corporate FD
AAA rated corporate FDs like HDFC Ltd, ICICI Home Finance Ltd offer a 1-2 percentage points higher interest rate than a bank FD.
PremiumBank fixed deposit is one of the most common and most favourite investment destination of the Indian households. But given the drop in the interest rates of bank FDs to around 5%, investors have started looking for alternative investment options to earn slightly better returns. Financial planners have started recommending AAA rated corporate fixed deposits to such investors but with a caution to be mindful of the risk. Unlike bank FDs, corporate FDs do not carry any guarantee of capital safety. AAA rated corporate FDs like HDFC Ltd, ICICI Home Finance Ltd offer a 1-2 percentage points higher interest rate than a bank FD.
An investor should be wary of these three risks of investing in corporate FDs :
Default risk: Unlike bank FDs, corporate FDs are unsecured. These instruments neither guarantee any capital protection nor interest payments. An investor may lost his money if a company faces financial distress.
Unattractive post-tax returns: Interest on corporate FDs is added to the investor's income and taxed as per the income tax slab rate applicable to an investor. For those falling in the highest tax bracket, corporate FDs do not look attractive.
Premature withdrawal attracts penalty: Most company fixed deposits come with a lock-in period of three months when an investor cannot take out any sum. Even after the lock-in period is over, withdrawal before maturity means closing the complete FD. There is no facility of partial withdrawal. Also, an investor will have to let go some interest in case of making a withdrawal before the FD matures.
Mutual fund managers however believe those who have have desired risk profile can invest in a very few selected company FDs with the highest rating.
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