Bank FD vs Corporate FD; Which is Better?

By nature, Indians are natural savers. It has proved several times. They prefer traditional saving instruments like Fixed Deposits(FD’s), Chits, Recurring Deposits(RD’s) etc to any other saving instruments. The main reason for this is they are backed by government institutions and are in practice for several years.

Though Indians are slowly routing to risky instruments like equities, mutual funds, majority of the Indians still prefer FD’s even today. Especially from olden days FD is an traditional instrument to save money, as a result FD has became a popular saving option.

What is Bank FD?

Bank Fixed Deposit(FD) is nothing but saving a fixed amount per particular tenure through Banks; whether it may be government run bank or private bank.

According to the recent amendment in the Finance Bill, a saver(Customer) is entitled to receive 5 Lakh as compensation, to the extent of FD amount the customer deposits in the Bank. In case the bank fails to repay, Indian government is liable to pay that amount .

This liability is not applicable to “Corporate FD‘s”

What is a corporate FD

These are also similar to Bank FD’s, but they are subject to credit risk. Normally corporate FD’s offer higher interest rates when compared to banks. The only risk associated with them is if that corporate firm bankrupts, your FD will be at high risk.

How to identify Whether Corporate FD’s are safe or not?

There is no guaranty to corporate FD’s, but the depositor can choose them on the basis of “CRISIL” Ratings which are declared from time-to-time.

Depositor can choose AAA or AA+ Rating deposits which are safer. CRISIL will upgrade/downgrade the ratings depending on the firm’s consistency. So one should have a close look over them.

Another drawback is they are not liable to compensate if the firm bankrupts. The only advantage is they offer higher returns than bank FD’s.

So, those who want to take calculated risk, choose AAA Rated FD’s to gain extra amount than bank FD’s.This is not possible to everyone. Who wants higher returns with associated risk can opt for corporate FD’s otherwise choose Bank FD’s as they are backed by government credit guarantee.

So it’s your turn to decide-choose one according to your risk appetite, goals etc.

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