Why are more and more people investing in corporate FDs?

“Interest in corporate FDs is on the rise again” screams a headline in The Economic Times newspaper today.

According to the report, applicants for company fixed deposits have been on the rise since the yields offered by these companies are higher than what banks offer. In fact the report says investors are actually pulling funds out of mutual funds and bank deposits.

Companies like Shriram Transport Finance, Mahindra and Mahindra Services and Dewan Housing Finance are offering 200-300 basis points more than what banks provide for three to five years deposits, the report said.

[caption id=“attachment_770251” align=“alignleft” width=“380”] Reuters[/caption]

However, company FDs did not always have a good reputation. In the past, such instruments had lost investor interest due to a number of frauds. However, the frauds did lead to stricter guidelines from regulators.

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The main reason why investors are looking into company FDs with interest is inflation. Due to higher inflation and lower real rate of interest, investors land up earning a negative rate of return, when they invest in bank FDs. And, since company FDs offer much higher returns as compared to bank FDs , this issue of negative rate of returns does not arise.

But, just because company FDs are offering higher returns does not mean, they work for all category of investors. Read this to know more about company FDs.