Fixed Deposits (FDs) are popular investment options for those who want a safe and steady source of multiplying their savings. The two common types of FDs include Bank FDs and Corporate FDs. Both term deposits come with their own set of benefits and challenges. Either option should be chosen according to the individual’s needs after carefully weighing the risks and returns.
Take a look at the differences between Bank and Corporate FDs and which could be a better investment option for you.
What is a Bank FD?
A Bank FD refers to a financial instrument provided by banks to common people as well as professional investors. To avail the benefits of this type of FD, one needs to deposit a lump sum amount with a bank for a specific period of time, which is referred to as the tenure of the deposit. The depositor then receives a predetermined rate of interest on this amount for the fixed tenure. In case the FD amount is withdrawn before maturity, one has to pay a penalty.
What is a Corporate FD?
A Corporate FD is a financial instrument that is offered by non-banking financial companies (NBFCs) or companies. It works similar to a Bank FD and one has to deposit a lump sum amount with the issuer for a fixed period of time and a fixed rate of interest is offered on such FDs.
What are the differences between Bank FDs and Corporate FDs?
There are five parameters on which Bank FDs and Corporate FDs differ.
- Issuer: Bank FDs are issued by banks whereas Corporate FDs are issued by Non-Banking Finance Companies (NBFCs) or other such corporate entities.
- Interest Rates: Bank FDs offer slightly lower interest rates than Corporate FDs, making them less attractive to professional investors.
- Safety: The safety of the corporate fixed deposit depends on the NBFC or corporation’s creditworthiness. Only higher-rated companies are normally considered to be safer. On the other hand, Bank FDs offer lower risk as the Indian government insures a maximum sum of Rs 5 lakh.
- Liquidity: Corporate FDs may charge higher penalties or not offer premature withdrawal. By contrast, Bank FDs offer better liquidation options as you can withdraw the amount by paying a smaller amount of penalty.
- Tax benefits: Some Bank FDs with a lock-in period of 5-10 years can give tax benefits. There are no tax exemptions of corporate term deposits.
Bank FD vs Corporate FD: Which is better?
Choosing between a Bank FD and Corporate FD depends on one’s financial goals and risk tolerance. If you are someone who is risk-averse, then opt for Bank FDs. If you are a professional investor and consider higher risks acceptable to get bigger returns, then go corporate fixed deposits.