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What are Corporate Deposits?

Created on 20 Aug 2018

Wraps up in 4 Min

Read by 762 people

Updated on 12 Oct 2020

Benjamin Franklin once said, “An investment in knowledge pays the best interest.”

With the changing economic climate, investment has become a norm. People would invest in various options present in the market rather than keep idle money in their hands. Of course, that makes perfect sense because the money invested accrues interest. This is a great method of earning income.

However, knowledge is power and it helps the investor to know the various options available to him and choose wisely that which suits him best. The growing investment market provides various options like shares, mutual funds, bonds, fixed deposits, etc. One such investment option is Corporate Deposits.

What are Corporate Deposits?

Corporate deposits are an attractive investment option present before retail investors today. Traditionally it is the bank and banking sector we look to when it comes to earning returns on our savings. Whether it is a savings account or a fixed deposit, individuals are comfortable in handing over their money to trusted banks for safekeeping and for earning interest on the same.

Corporate deposits are in some ways quite similar to fixed deposits offered by banking institutions. They are of a similar nature, however; the key difference lies in who offers them. Corporate deposits are offered by companies whereas fixed deposits are offered by banking institutions.

Let’s take a glance at the similarities and differences between Corporate Deposits and Bank Fixed Deposits:

  CORPORATE DEPOSITS FIXED DEPOSITS
Offered by Corporate deposits are offered by companies. Fixed deposits are offered by banks.
Interest rates Offer higher rates of return as compared to fixed deposits Offer relatively lower rates of return 
Risk factor High rates of interest denotes that the risk factor is also high. Fixed deposits have conventional level of risk and secure investments.
Period of investment Corporate deposits have long terms ranging from 1 year to 3 years.

Fixed deposits are comparatively shorter in tenure ranging from monthly deposits to yearly deposits.

 

Why choose Corporate Deposits?

Corporate deposits are more or less fixed deposits offered by banks. However, when compared to bank fixed deposits the interest offered by the companies in corporate deposits is higher. This is owing to risk involved in corporate deposits. Nonetheless, the risk is a part of every investment and the investor must weigh his options correctly before investing. Higher interest rates can lead to high income for the investors.

Precautions to be taken when investing in Corporate Deposits.

While higher interest rates can be beneficial for the investors, they are also indicative of the high risk involved in corporate deposits.

Corporate Deposits come with no security. Unlike banks FD’s which provide security up to an investment of 1 Lakh Rupees, corporate deposits come with no such security. Hence if a company goes bankrupt, investors have little recourse. Corporate deposits are like unsecured loans and the investors must be completely aware of the high risk involved in making such an investment.

The credit rating of the companies and their deposits must be taken into account. An assessment of the company offering the deposits is to be made when investing in a corporate deposit. Investors should choose a reliable company; one they know is trustworthy. Now, this can be a hard task for those unaware of the inner workings of the company especially novice investors.

A good way to check the credibility of a company is to look at their credit rating. Credit ratings are ratings given to companies and their deposits by credit rating agencies after an in-depth analysis of the financial and business risks involved, the management of the company, the cash flow and whether they have previously defaulted and whether these defaults have been made good.

Investors should only invest in deposits of companies which have AAA or AA credit rating. Any rating less than that is a risk. Also, if there is any negative change in the rating of the company and its deposits, it's better to withdraw your investment and pay the small foreclosure penalty than risk losing the entire investment. Where a company does not have a credit rating it’s better to not invest in any deposits of that company.

Don’t put all your eggs in one basket.

While investing huge sums, the investor should not invest the entire amount in one deposit. Investing in various different options available is always a better idea. This way the risk is minimized in some ways as the failure of one investment does not cause loss to the other.

Thus, to invest anywhere the investor must get to know the intricacies of the investment, carefully weigh his options and then invest.

While higher interest rates can be beneficial for the investors, they are also indicative of the high risk involved in corporate deposits.

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Ayushi Upadhyay

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A Keen Learner. Tiny, brainy, and studious, this quiet one stays in her zone until she pops. And once she does, boy, are her comebacks snappy! There is no financial question that she can't answer through her magical blog-writing. 

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