All about Company Fixed Deposits
Company Fixed Deposits are deposits accepted by manufacturing companies, financial institutions, Non-Banking Finance Companies, Housing Finance Companies, Government companies etc. from the public offering a fixed rate to interest over a fixed period say one year, five years etc. Those deposits are accepted as per provisions of Section 58A of Companies Act 1956. These deposits are unsecured, i.e., if the company defaults, the investor cannot recover the amount deposited thus making them a risky investment option. You can earn 9.00% – 13.00% depending upon the credit rating of the company. Company FDs have always offer interest which is 2-3% higher than Bank FDs, the reason is that, in case they wanted to borrow money from banks, they needs to pay more interest say 16-20%. But you have to be very careful in selecting the best deposit schemes. Usually the interest is paid on monthly/quarterly/half yearly/ yearly or cumulative basis. In case the interest payment is above Rs. 5,000.00 Tax will be deducted at source. There is no provision for capital appreciation; the depositor will get back only the money he deposited. Company Fixed Deposits can be accepted by a Manufacturing Company having duration from 6 months to 3 years. Non-Banking Finance Company can accept deposit from 1 year to 5 years period. A Housing Finance Company can accept deposit from 1 year to 7 years.
Guidelines to choose a good company deposit scheme
a) Ignore the unrated Company Deposit Schemes. Ignore deposit schemes of little known manufacturing companies. For NBFC's, RBI has made it mandatory to have an 'A' rating to be eligible to accept public deposits, one should go further and look at only high rated deposits schemes.
b) Within a given rating grade, choose the company with a better reputation.
c) Once you decide on a company, next choose the schemes that have given a better return. Unless you need income regularly, you should prefer cumulative to regular income option since the interest earned automatically gets reinvested at the same coupon rate giving upon better yields. It also gives you a lump-sum amount at time of maturity.
d) It is better to make shorter deposit of around 1 year to 3 years. This way you not only can keep a watch on the company's rating and servicing but can also plan to have your money back in case of emergency.
e) Check on the servicing standards of the company. You should not oblige companies that care little about investor services like promptly sending interest warrants or the principal cheque.
f) Please take the advice from your financial planner / Investment Advisor
Please avoid investing in following companies
a) Companies which offer interest higher than 15%.
b) Companies which are not paying regular dividends to the shareholder.
c) Companies whose Balance Sheet shows losses.
d) Companies which are below investment grade rating.
Periodic Review
The performance of the companies should be reviewed at maturity. This will help you decide whether to renew or reshuffle the deposit. It is also wise to keep a track of these companies by checking their share prices, annual reports and other details reported in newspapers. Please remember that, company deposits are risky when compared to bank deposits, so the amount invested should be spread over a large number of companies. This will help the investor to diversify his risk among various companies/industries. Investors should not put more than 10-15% of their total investible funds in one company fixed deposits
