Although, both companies and banks issue fixed deposits, there is a vital difference between them.  Fixed deposits issued by banks are considered to be safer than the company fixed deposits as the banks have central government backing to their credit. Corporate deposits enjoy no such benefits and are hence termed as unsecured.

Unsecured fixed deposit means that, in case if the company issuing the fixed deposit goes bankrupt, the investor won’t have any lien on the assets of the company.

Factors to be taken in to consideration before investing in bank FD:

Credit ratings check:

An investor needs o check the credit rating of the company issuing the fixed deposits. There are lots of credit rating firms which rate the company FD’s on the basis of risk. The companies with the highest rating are termed as safest whereas the companies with the lowest rating are termed as riskier.

Past records:

Check the previous history of the companies issuing fixed deposits. Check whether the company has defaulted in the past and their credit history. Also check the dividend payment history of the company, promoters track record etc. In short, you have to take all the factors in to consideration which you would have taken had you invested in equity of the company.

Future business potential:

See whether the company issuing the fixed deposit, has future growth potential. Check the background and the financials of the company to spot irregularities, if any. If the company goes in dumps, it will take you down with it.

It is compulsory for a company to get its fixed deposits rated by the credit rating agencies. As far as possible, the investor should invest in corporate FD’s which have the highest rating. However, many a times the investors are tempted to invest in low rated deposits simply because these deposits offer higher interest rates. Deposits with lower rating always carry a high coupon or interest rate, simply because they are on a riskier side. Once you have decided that you want to invest in a company’s fixed deposit, decide on the options for interest payment. You can opt for a regular income option where you will get the fixed interest every year or you can opt for cumulative option where the interest earned every year will be added on to the principal. A shorter deposit is considered to be the safest option as it ensures more liquidity and less default risk.