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Home >> Investments >> Fixed Deposit

Fixed Deposits

Indian investors are very familiar with fixed deposits and generally associate with bank fixed deposits. Banks are the largest issuers of bank fixed deposits to retail investors in India. Since banks invoke the single most important factor i.e. trust in the minds of retail investors. Bank fixed deposits being guaranteed upto Rs 1 lac by the Deposit Insurance & Credit guarantee corporation of India Ltd. However there are other entities also who issue the fixed deposits and mobilize money from retail investors in India. There are two important factor in case of Fixed deposits in India: 

  • Fixed investment term
  • Fixed rate of interest over the term of the products

However the fixed deposits carry the rate of interest indicated at the time of beginning only if the instrument is held till maturity. Otherwise there is a pre-encashment deduction on fixed deposits.

Corporate Fixed deposits

Fixed deposits are also issued by many other type of entities and can be broadly classified as: Fixed deposits issued by the PSU companies, Fixed deposits issued by NBFCs, Fixed deposits issued by the private corporate or AA rated corporate.

There have been some credit defaults by some of these private companies and retails investor are scared of investing in such companies. But there are many good PSU companies or triple A rated corporate involved in sound business who also offer fixed deposits at attractive rate of interests. E.g.. Fixed deposits schemes from companies like PNBHFL, LICHFL, or HDFC etc offer the retail investors a good option to earn better rate of interest than compared to a bank fixed deposits. Should you have queries related to any of the fixed deposits schemes offered by the Indian companies, you can submit such queries in our query by choosing the fixed deposit button at the top of this page. 

While choosing the fixed deposits of the private corporate there are a couple of important factors. The interest rates offered on such deposits should not be the only consideration.

  • What are the options for investment e.g. cumulative or regular interest payout and whether that suits your requirements?
  • What is the current rate of inflation and is your investment in fixed deposits whether in banks or in corporate fixed deposits giving you a positive real rate of return i.e. adjusted for inflation.
  • What is the impact of taxation on the net return and is your net return positive adjusted for applicable taxes and how does it fit into your overall tax planning. The taxation on fixed deposits cannot be looked into isolation.

A bank fixed deposit can give you a return which would be very close or slightly higher than the current rate of inflation. Even Post office schemes or other schemes offered by the Govt of India barely manage to beat the real impact of inflation. Therefore the Corporate fixed deposits become an important part of the investor portfolio. If chosen carefully, fixed deposit deposits can help you increase the net return on your investment portfolio. While choosing such fixed deposits one should always keep in mind the following factors:

  • Credit rating of the company is the single important factor while choosing the bank fixed deposit. It is endorsement of a 3rd party credit rating agency of your decision to invest in the company.
  • Dividend paying track record of the company
  • Company business fundamentals, what is the overall environment for the business in the segment of the economy the company is operating. Even good companies tend to suffer because of the bad business environment and Govt policies.
  • Track record of the top management is equally important deciding factor
  • The credit risk associated with the company fixed deposits should also be given equal weightage, the interest rates offered by the company should not be the single important factor, and higher the interest higher would be the credit risk.

While choosing company fixed deposits one should bear in mind to diversify the investment into Fixed deposits schemes of PSU Companies, BANKS, and AAA rated corporate deposits with some exposure to other good companies. The retail investors’ would strictly not choose the unrated companies at all. Also if you are investing in corporate fixed deposits schemes you shouldn’t invest in longer duration fixed deposits, preference should be give to 1 -2 years deposits. In case of Banks or PSU companies you can choose slightly longer term fixed deposits ranging from 3 to 5 years.