Investing can be simple if one understands the basics. The key aspects need to be understood first before arriving at any decision. Often, lack of information and misinterpretation of details causes unhealthy investment choices. When it comes to Corporate Fixed Deposits, there are various jargons that can be confusing to the common investor. Multiple terminologies for a single product often cause more confusion than clarity, and the end investor gets stuck before actually making an investment.
Here are the five important terminologies that one needs to know and understand before investing:
- Interest Rate - Interest is the capital appreciation or the profits earned over and above the principal amount invested. The rate at which the invested amount grows over a particular time period is commonly referred to as the Interest rate. Interest rate is usually denoted in % terms. Interest rates can rest monthly/quarterly/semi-annually/annually based on the choices provided by the corporate fixed deposits.
- Tenure - The time horizon of the invested amount till maturity is known as tenure. The duration of each and every investment always has a specific tenure. Tenure depicts the lock-in duration or period up to which the investment amount has a fixed rate of return. Usually, the shorter the tenure, the shorter the rate of return, and as the tenure of the corporate deposits increases, the rate of return also increases gradually.
- Effective Yield - The compounded growth rate of interest earned on the investment is known as the effective yield. It is calculated on an annualized basis. This shows the actual year-on-year returns that the corporate deposits deliver for the investors. For example, a savings-bank account gives roughly 2.5-3% interest per annum, whereas a corporate deposit could yield anywhere between 6% to 9.5% per annum for the same time period.
- Cumulative - An option wherein the interest is accumulated along with the principal amount as unrealized gains, and on maturity, it is paid out wholly to the investor. The interest rates are said to be higher in this option when compared to Non-Cumulative. This is usually opted for when a goal is achieved in a specific time horizon.
- Non-Cumulative - Another option wherein the interest is paid out in regular installments, in a prescribed manner as per the frequency of payout mechanisms, and the principal invested capital does not have any appreciation or gains during maturity. The frequency of payouts is generally monthly/quarterly/semi-annually/annually. This is usually opted for when there is a requirement for periodic income or to create a source of regular earnings to meet routine expenses.
AssetPlus has recently launched attractive corporate fixed deposits by partnering with reputed companies like Shriram Transport Finance and Mahindra Finance.
It is necessary to understand these terminologies before investing in Corporate Fixed Deposits to avoid simple yet harmful mistakes. Consult your investment manager before investing.
