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Company FD Vs Bank FD: What’s The Best Option For Seniors?

FDs are one of the most liked investment products among senior citizens. Do you know seniors can also invest in company FDs that offer a preferential interest rate similar to bank FDs

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Amit Sethi
December 2, 2023
Company FD or Bank FD

Company FD or Bank FD

Debt investments are usually preferred by investors with a low-risk appetite, such as senior citizens. Therefore, after retirement, they usually park a substantial portion of their corpus in the bank FDs. However, there are several company FD options also available in the market that seem quite similar to the bank FDs in terms of interest and benefits. In reality, there are some crucial differences between the company and the bank FDs that you must keep in mind while planning to choose any one of these investment options. Let’s understand the features of both products and find out the best option between Company FD or Bank FD for you.

Bank FDs Are Highly Popular Among Seniors

Bank FDs are highly reliable and one of investors’ most trusted investment products. The interest rate offered by bank FDs remains the same till maturity. One of the key features of the bank FDs is its high level of safety. Investments in bank FDs are insured by Deposit Insurance and Credit Guarantee Corporation (DICGC). This insurance covers aggregate deposits of up to Rs 5 lakh, including FDs, savings accounts, and current account deposits in a bank. Seniors depositing up to Rs 5 lakh in the bank are protected by insurance, so they feel safer when putting money in bank FDs.

Bank usually offers higher interest on FDs for seniors compared to the interest rate offered on regular FD accounts. The additional interest benefit for seniors usually ranges from 25 to 75 basis points over the normal deposit rates. Banks also allow overdraft facilities on FDs, so seniors can use them to meet a sudden short-term financial liquidity crunch without breaking their FDs.

Company FD Can Offer An Attractive Interest Rate

There are several companies that allow FD options similar to bank FDs. Interest offered in the company FDs are often very attractive and usually higher than the interest rate offered on FDs by large banks. However, in terms of safety, they carry a greater risk compared to bank FDs as they are not covered under the insurance by DICGC. However, company FDs are rated by credit rating agencies, showing the level of safety in terms of repayment of interest and the principal. The highest rating (Usually ‘AAA’) usually indicates the highest level of safety, and as the rating goes down, it shows the increased risk of default. Most companies allow an extra interest for seniors ranging around 25 to 50 basis points over and above normal deposit rates for the applicable tenure.

What’s the best option for you?

In the current market, there are some banks that are offering higher interest rates than most of the top-rated corporate FDs. The DICGC insurance coverage makes bank FDs more attractive options for seniors. Seniors can get a loan-to-value (LTV) of 90 to 95 percent against the bank FDs, but in corporate deposits, usually, there is a lower LTV of around 75 percent. When the interest rate trend reverses, company FDs may offer a better return than bank FDs, so seniors may consider them when the situation is more appropriate.

The author is an independent financial journalist.

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