Corporate FD vs. SFB FD: How much risk for ~9% interest? Find out where it is better to invest...

Corporate FD vs. SFB FD: If your bank is offering 6.5%–7% interest on FDs, the prospect of earning close to 9% can be tempting. Currently, some corporate FDs offer interest rates of up to approximately 8.95% for select tenures. Certain Small Finance Banks (SFBs) are also offering interest rates exceeding 8%.

At first glance, an FD with a higher interest rate seems more attractive. However, the matter is not that simple; the level of capital safety differs between the two. Therefore, one should not base the decision solely on the interest rate when choosing an FD.

Higher Risk in Corporate FDs

Corporate FDs are issued by companies and Non-Banking Financial Companies (NBFCs). You lend your money to the company, and in return, it pays you a fixed rate of interest. Some corporate FDs currently offer rates up to around 8.95%, with senior citizens sometimes receiving slightly higher rates. However, there is a significant risk involved: corporate FDs do not come with the DICGC insurance coverage that bank FDs enjoy.

This means that if the company faces difficulties in repaying the funds, your risk increases. Consequently, before investing in such FDs, it is crucial to check the company's credit rating and understand its financial health. Opting for an FD solely based on high interest rates is not advisable.

Interest Rates Exceeding 8% on SFB FDs

Small Finance Banks (SFBs) are also offering attractive interest rates on FDs. Some banks provide returns of 8% or higher for specific tenures. The biggest advantage here is the safety of the deposit; bank deposits are covered by DICGC insurance. Under this scheme, a depositor is protected for a total deposit amount of up to ₹5 lakh per bank, covering both the principal and the interest.

According to Adil Shetty, CEO of BankBazaar, safety should be the top priority when selecting an FD. SFB FDs offer DICGC protection up to ₹5 lakh. In contrast, while corporate FDs may offer higher interest rates, they also carry the company's credit risk.

What if you have more than ₹5 lakh to invest?

It is important to understand one thing here: the DICGC limit of ₹5 lakh applies individually to each bank. Suppose you have ₹10 lakh. If you keep the entire amount in a single Small Finance Bank (SFB), only up to ₹5 lakh of the deposit will be covered by DICGC insurance.

In such a scenario, distributing your funds across different banks could be a strategy. This allows you to avail the benefit of insurance coverage across multiple banks.

Corporate FD or SFB FD—which one should you choose?

If you seek higher interest rates and are willing to take on slightly more risk, you might consider corporate FDs. However, be sure to first check the company's credit rating and financial health. If your priority is safety and you are earning around 8% interest, an SFB FD could be a more comfortable option.

There is another factor to consider: the FD tenure. If you need the funds before maturity, breaking the FD prematurely could result in lower interest earnings. In some cases, a penalty may also be levied. Therefore, you should keep this aspect in mind when selecting an FD.

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