If you want return in the range of 8 to 15% (15% return is quite competitive with respect to stock market returns) considering you are risk averse and you do not want to invest in stock market, what are the options available with you? There is an investment option i.e. Company Fixed Deposits which can be good alternative for investors with low risk appetite and high return expectation. Let’s discuss the suitability of this investment option.

What are Company Fixed Deposits?

Company fixed deposits are similar to the famous Bank deposits but in this case deposits are managed by a corporate firm which is not a bank. It can be a NBFC, listed public limited company or private firm. Main difference between a Banks Fixed Deposit and Company Fixed Deposit from risk perspective is the loan guarantee of up to Rs 1 lakh given by RBI against Bank Fixed Deposits. Company Fixed Deposits are not secured by RBI and hence they are considered risky as compared to Bank Deposits.

Pros and Cons of Company Fixed Deposits

Pros

Cons

  • Higher Interest rate (9% to 16%) as compared to Bank Deposits (9 to 10%)
  • These are short term deposits (Ranging from 6 months to 1 year)
  • Income tax is not deducted at source if the interest income is less than 5000
  • Deposit can be spread in more than one company so as to keep the interest income lower than 5000 from each of them to avoid tax deduction at source
  • Company Deposits are not Secured by RBI as is the case for Bank Deposits
  • Procedure of foreclosure is complex Guidelines may vary from company to company. Heavy penalty or reduction in interest rate in case of foreclosure
  • Possibility of default of payment by company is high as compared to Bank Deposit
  • Proper research needs to be done before choosing a company for investment

 

Risk Analysis

Company Fixed Deposits are prone to default risk as at maturity company might not be in a position to repay the accrued amount. There might be various reasons for non payments like bankruptcy, fraud, cash crunch due to business loss etc. These loans are not secured by RBI as done for Bank Deposits so investors do not have insurance of even Rs 1 Lakh.

Who Should Invest

As there is a default risk involved and these deposits are slightly risky, you need to take out some time for research before you plan to invest. It’s not recommended that you should out rightly reject this option as there are credible companies like TATA’s, M&M involved in it. Rather you need to do some analysis to find out the best option as per your risk profile. Some of the important checks which you should apply before choosing a company fixed deposit are listed below:

  1. Check the rating assigned to the corporate fixed deposit by rating agency like ICRA, CRISIL. Rating should be high as low rated deposits are prone to default.
  2. Financial health of the company – Profit, Debt, EPS etc should be in good shape.
  3. Dividend Payout history of the company – It should have a healthy history of dividend payments
  4. Promoters History – Promoters should not be in defaulters list.
  5. Companies Management capability – Management should be of high quality as they are the one who will be managing the amount deposited.
  6. Overpromising rates – People should avoid deposits which are offering return above 15%.

Conclusion

If you are comfortable with doing a little bit of research Company Deposits can be promising investment options. Thumb rule is to go with renowned names having proven track record. It’s not advisable to be invested in long term deposits as default risk increases with tenure.

 

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