Corporate FDs: Muthoot offers 8.95%, Shriram 7.5%; what investors should know before investing

Corporate fixed deposits (FDs) are offering interest rates of up to 8.95% a year, giving investors an opportunity to earn higher returns than many traditional bank deposits. However, the highest rate does not necessarily mean the best investment, as corporate FDs carry issuer-specific credit risk that investors need to consider alongside the interest offered.

Among the corporate FDs in the comparison, Muthoot Capital Services offers the highest rate, at 8.95% for a three-year tenure. Its five-year FD offers 8.50%, while the one-year rate stands at 7.90%. The deposits carry a CRISIL A+/Stable rating.

Shriram Finance, in comparison, offers a maximum FD interest rate of 7.50% for three- to five-year tenures. Its deposits are rated AAA/Stable by CRISIL Ratings, ICRA, India Ratings and Research, and CARE Ratings.

This creates a clear trade-off for investors. Muthoot Capital's three-year rate is 1.45 percentage points higher than Shriram Finance's 7.50% rate, but Shriram carries a significantly stronger credit rating across multiple rating agencies.

Higher rates, higher credit risk?

Other corporate FDs also offer rates above those available from several AAA-rated issuers. Manipal Housing Finance Syndicate offers 8.25% for one- and three-year deposits and 7.75% for five years. Its deposits carry an Acuite A rating.

Among AAA-rated options, Mahindra Finance offers 7% for three- and five-year deposits, while Sundaram Home Finance offers 7% for three years and 7.15% for five years. ICICI Home Finance offers 6.90% for three years and 7% for five years. LIC Housing Finance offers 6.85% for three years and 6.90% for five years.

PNB Housing Finance, which has ratings including CARE AAA/Stable and CRISIL AA/Stable in the supplied data, offers 6.90% for three- and five-year deposits.

The comparison shows that investors are effectively choosing between higher yield and stronger credit quality. A higher interest rate compensates investors, at least partly, for taking on greater issuer risk. AAA-rated deposits generally signal stronger creditworthiness, although a rating is not a guarantee against losses.

What should investors consider?

Interest rates should therefore be assessed alongside the issuer's credit rating, tenure and terms of the deposit. Investors should also examine premature withdrawal conditions, taxation and whether they are comfortable locking money in for the selected period.

Senior citizens can receive additional interest on several of these deposits. Shriram Finance, for instance, offers an additional 0.50 percentage point to senior citizens, while Muthoot Capital provides an additional 0.25 percentage point.

For an investor prioritising returns, Muthoot Capital's 8.95% three-year rate stands out. For someone placing greater emphasis on credit quality, Shriram Finance's 7.50% rate comes with AAA/Stable ratings from four rating agencies.

The decision ultimately depends on an investor's risk appetite. The comparison makes one point clear: a corporate FD offering the highest interest rate is not automatically the most suitable option.