Normal FD vs Special FD: When discussing safe investments in India, the first thing that usually comes to mind is Fixed Deposit (FD). However, in recent years, a new investment option has quickly gained popularity among investors, known as ‘Corporate FD’ or Company FD. Many people choose to invest in these options due to the attractive interest rates, but they often overlook the underlying mathematics and associated risks.
If you’re thinking about putting your hard-earned money into an FD, it’s crucial to understand which choice, a traditional bank FD or a corporate FD, is the best fit for you. Let’s break down the differences between the two in straightforward terms.
What is the basic difference?
To start, we need to grasp how these two types of FDs operate. When you open a bank FD, you are essentially lending your money to the bank, which functions under strict regulations set by the RBI. On the other hand, when you invest in a corporate FD, you are lending your money to a private company or a non-banking financial company (NBFC) for a predetermined period. Companies seek funds from the public to grow their businesses and, in return, they pay interest.
Who is giving more profit?
Corporate FDs generally provide better returns compared to bank FDs. FDs from reputable companies often offer interest rates that are 1 to 2 percent higher than those of bank FDs, and sometimes even more. This difference is particularly appealing to senior citizens. Companies are able to offer higher interest rates because they need to pay substantial interest on bank loans, so they opt to raise funds from the public by providing slightly better rates. If your primary concern is returns, corporate FDs take the lead.
Where is the money safe?
This is where the real distinction comes into play. Bank FDs are regarded as the safest option because they come with government insurance on deposits up to Rs 5 lakh under the DICGC. Even if the bank fails, your principal and interest up to Rs 5 lakh are safeguarded. In contrast, corporate FDs are entirely unsecured. They do not offer any government guarantee.
If the company goes bankrupt or runs away, you could lose all your money. Therefore, before investing in a corporate FD, it’s crucial to check the company’s credit rating (e.g., AAA, AA). The better the rating, the safer your money.
Bank FDs offer a better liquidity advantage, as they offer the convenience of withdrawing funds whenever needed. You can break a bank FD at any time, with a small penalty. However, corporate FDs typically have a three-month lock-in period, preventing withdrawals before that time. Even after this, if you withdraw prematurely, the penalty is strict, and a significant portion of the interest is often deducted.