Company FD Or A Bank FD? Which Is The Best Choice For You?

Company FDs and Bank FDs, each come with certain pros and cons. It is important to understand the same before making an investment decision. Fixed deposits will remain one of the most popular investment options in India. But besides banks, companies also offer this investment option. Here is what you need to know about both:

What are They?

A bank FD is an investment scheme that offers fixed returns over a fixed tenure and is secured in nature. As a result, it is availed by many. Notably, it also offers higher returns in comparison to a Savings account and is a popular savings instrument.

Similarly, a company fixed deposit is one offered by the corporates. Here too, there is a fixed interest rate and tenure involved. But the main difference is that a company FD can give you much greater returns. Besides companies, different financial institutions also offer deposits that are similar to a company FD.

Note that a company FD is treated as an unsecured loan and falls legally under the Companies Act. What this means is, there is no collateral of the company against which your investment is secured. Hence, if the company fails to make a payment, you can land in a problematic situation.

Return on Investment:

A bank fixed deposit can give you a return of around 6-8%. In the case of a company FD, this may be as high as 8-10%.

There remains a certain cause of concern with a bank FD. Interest rates that were once around 10% have now come down to 7%. This trend began in 2014 with when a major bank decreased the interest rates on an FD. Consequently, numerous banks also reduced their respective interest rates.

As a result of this trend, there has been a growing interest in company FDs as they are offering better rate of interest on FD in comparison to a bank FD.

Security of your Investment:

Essentially, a bank fixed deposit is a very safe investment option. It falls under the purview of the Reserve Bank of India (RBI) and you can be completely certain about getting the returns.

However, when it comes to a company FD, things are not so bright. You do not have any collateral against which your investment is secured. As a result, there is a certain risk of loss associated with investing in a company fixed deposit.

You can reduce the risk of investing in a company FD by investing in rated company deposits. Also, always take the credentials of the company into consideration while making this investment. It is preferable to invest only in companies with an AAA rating. However, Short term Investment in an AA company are still an acceptable option.

Fixed Deposit Investment

Another concern is that you may not be able to make a premature withdrawal from a company FD. This means that you can face a liquidity crunch. In times of a financial emergency, this can be quite troubling. If this is something that is not acceptable to you, then you may want to avoid investing in a company FD.

Moreover, to deal with this situation, it is better to have a diverse investment portfolio. Depending on your age, earnings and risk handling capacity, you can decide on how much to invest in a company or bank FD besides other options such as mutual funds and stocks.

For example, a new investor who is more open to risks can invest more in a company FD. On the other hand, someone who is nearing their retirement may be looking to keep risks at an absolute minimum. Herein, a larger portion of or a complete investment only in a bank FD would be much more suitable.

Thus, company and bank FDs can each come with their share of pros and cons. It is important to be aware of and evaluate the same before investing in the same.