“Investment may generate income for you in two ways. First is to invest in a saleable asset and you may earn income by way of profit. Second, if Investment is made in a return generating plan, then you will earn an income via accumulation of gains.”
Corporate Fixed Deposit is a deposit for the fixed tenure with predetermined fixed rates of interest. Financial & NBFCs (Non Banking Financial Companies) offers these fixed deposits. Maturities of these fixed deposits may vary from few months to few years. Corporate credit ratings are issued by rating agencies and help investors determine the riskiness associated with investing in a corporate bond. A triple-A (AAA) is the highest credit quality, and C or D (depending on the agency issuing the rating) is the lowest or junk quality.
Key Features
*Higher Interest
*Short to Medium term deposit
*Lock-in period may vary from few months to few years.
*Investment can be made in multiple companies for diversification & TDS benefit.
Fixed Maturity Plan (FMP) is a fixed tenure mutual fund scheme that invests its corpus in debt instruments maturing in line with the tenure of the scheme. The tenure of FMP can vary between a few months to a few years.
Key Features
*Fixed Tenure- Fixed maturity plans offer investors an option of choosing a plan that suits their investment horizon and their cash flow needs. Investors get to know in advance approximately how much returns they would get by investing at the NFO stage. The investments made in FMPs are fixed and cannot be withdrawn until they mature.
*Closed-ended Funds- The investment option is made available only during the initial offer period of the scheme, and the redemption is allowed only at the time of maturity. There is an option though, where unitholders who have units held in demat mode, can sell their units on the stock exchange which have units of a fixed maturity plan scheme listed. This way, they can exit the fixed maturity plan ahead of its tenure.
*Investment Strategy- Fixed maturity plans invest in commercial papers (CP), certificate of deposits (CD), corporate bonds, money market instruments, government-issued securities, and non-convertible debentures (NCD) of high rated and reputed companies. The maturities fall in line with the tenure of the scheme.
*Sensitivity to Interest Rates- Fixed maturity plans have minimum exposure to the interest rate risk as the fund holds the instruments until maturity, which allows it to yield a relatively fixed rate of return.
*Credit Risk- Since fixed maturity plans invest predominantly in high rated credit instruments, the risk of default is minimised. Also, the risk of liquidity is minimal.
*Tax Implications- Investor may available 20% indexation benefits on maturity on investment more them 36 months
*Balancing of Portfolio-Fixed maturity plans offer stable returns throughout the tenure and work as an asset allocation tool, and this allows the scheme to find investors from a broad investor base.
A debenture is a type of bond or other debt instrument that is unsecured by collateral. Since debentures have no collateral backing, they must rely on the creditworthiness and reputation of the issuer for support. Both corporations and governments frequently issue debentures to raise capital or funds.
Governments typically issue long-term bonds—those with maturities of longer than 10 years. Considered low-risk investments, these government bonds have the backing of the government issuer. Corporations also use debentures as long-term loans. However, the debentures of corporations are unsecured. Instead, they have the backing of only the financial viability and creditworthiness of the underlying company. These debt instruments pay an interest rate and are redeemable or repayable on a fixed date.
Convertible debentures are bonds that can convert into equity shares of the issuing corporation after a specific period. Convertible debentures are hybrid financial products with the benefits of both debt and equity. Companies use debentures as fixed-rate loans and pay fixed interest payments. However, the holders of the debenture have the option of holding the loan until maturity and receive the interest payments or convert the loan into equity shares.
Non-convertible debentures are traditional debentures that cannot be converted into equity of the issuing corporation. To compensate for the lack of convertibility investors are rewarded with a higher interest rate when compared to convertible debentures.