As interest rates are likely to fall, it may be a good time to lock money into top-rated corporate deposits for higher yields. Risk-averse depositors can even look at deposits of small finance banks (SFB) to earn higher returns than that offered by state-owned and major private sector banks.
While interest rates of corporate deposits are 150 to 200 basis points (bps) more than that of fixed deposits (FDs) of public sector banks, that of SFBs are 100 to 150 bps more. Experts suggest depositors look at FDs of multiple maturities, preferably three years and above, which can help them to reduce the reinvestment risk arising from interest rate fluctuations.
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For instance, while State Bank of India is offering 6.5% for a 5-year FD, Shriram Finance is offering 8.47% and Jana Small Finance Bank 8.2% for the same tenure.
Corporate deposits
Companies offer either cumulative deposits where the principal and interest amount are paid out on maturity or interest-generating deposits that provide liquidity at fixed intervals, such as once a quarter. The spread between corporate and bank FD rates depend on the credit ratings assigned to those deposit-issuing corporates. Corporates having lower credit ratings will offer higher spreads to compensate for the higher credit risk. Individuals must factor in their investment horizon and liquidity requirements while choosing the deposit tenure.
Depositors should carefully consider their risk appetite before investing in corporate FDs. Adhil Shetty, CEO, Bankbazaar, says corporate deposits are a good option for those looking to pad up their fixed income returns. “Check the company’s credit ratings. AAA-rated companies are ideal as lower ratings imply higher risks for the investor.”
Deposits of small finance banks
Individuals can consider fixed deposits offered by SFBs to earn higher returns than rates offered by state-owned banks and major private sector banks. “Many small finance banks are still offering FD yields of 8% and above, which are at par or higher than many corporate FDs,” says Gaurav Aggarwal, chief business officer, Unsecured Loans, Paisbazaar.
Moreover, these deposits with small finance banks also offer higher capital protection than corporate FDs. Small finance banks are categorised as scheduled banks by the RBI, which covers their depositors under the deposit insurance scheme, a form of statutory capital protection offered by DICGC,
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