Thursday, 3 May 2012

Company Fixed Deposits- Should You Invest?


Company Fixed Deposits in layman terms is nothing but fixed deposits offered by companies. Company Fixed Deposits offer higher returns than Bank Fixed Deposits. Company Deposits are unsecured deposits; there is an element of risk associated with Company Fixed Deposits. The investor will not be able to recover his capital if the company goes into financial crisis. Investors would not have any rights on the assets of the company. Interest rates offered by these companies are in the range of 9% to 15%. Further you get option to choose the frequency of interest payout. It could be Monthly, Quarterly, Half Yearly, Yearly or on Maturity.
Instead of going for lengthy write up, let’s walk through the rest of the details in the form of FAQ.
Q:What are the Types of Companies that offer Fixed Deposits?
A:Non Banking Financial Companies (NBFC), Manufacturing Companies, Housing Finance Companies, Financial Institutions.
Q:Are Company Deposits Secured?
A:No. Company Deposits are not secured. If the company goes into financial crisis the investor will not be able to recover his capital. This is what makes Company Deposits risky investment. Fixed Deposits offered by Bank come with some security. Investment up to 1 lakh is secured by Deposit Insurance and Credit Guarantee Corporation (DICGC).
Q:What is the Tax Implication? 
A:Returns of Company Fixed Deposits are fully taxable. The interest earned will be added to income and taxed as per investor’s tax bracket. Further TDS is deducted if the interest income exceeds 5000 per financial year.
Q:What is the minimum tenure for Company Fixed Deposits?
A:Generally minimum tenure of Company Fixed Deposits is 6 months. NBFC accept deposits from 1 year up to 5 years.
Q:How to choose the right company for investment.
A:Reputation of the company is very important. Avoid companies that do not have strong track record. Be extra cautious when the interest offered is more than 14%. Companies that skip the dividend or have poor balance sheet should be avoided. Stay away from company with low rating or in other words choose companies that have ratings of AA+ or higher.
Q:Who gives the credit rating?
A:CRISIL and ICRA are companies that rate companies offering fixed deposits.AAA denotes good rating.
Q:Is the Company Fixed Deposits transferable?
A:Company Fixed Deposits are not transferable. This means there negligible threat of receipt being stolen. In case you lose the receipt you need company would issue you duplicate certificate (The Original one will stand void)
Q:Is premature withdrawal Possible?
A:Companies do allow premature withdrawal. They do come with conditions and penalties. Generally you cannot withdraw before 3 months.  Withdrawal after 3 months is possible; however you would not earn any interest if withdrawn before 6 months. Premature withdrawal after 6 month you will be paid interest but the interest will be lesser by 2% to 3% than what was promised at the deposit acceptance.
Q:Any word of caution for investors?
A:In the past there have been instances where companies have defaulted and investors have lost their entire capital.  Don’t get tempted by higher interest rates offered by smaller companies. Rating provided by rating agency is very important and cannot be ignored.  In other words invest only if you are sure about the credibility.
Take Away: Though Company Fixed Deposits generally offer higher interest than what banks offer on a normal fixed deposit. Fundamentals of the company are very important and Rating provided by rating agency cannot be ignored. Invest as per your risk appetite.
Have you invested in Company Deposits?


kings said...

I have invested in muthoot finance gold bonds. are they safe???

WealthUCreate said...

rating persay, it is ok. NBFC do carry a element of risk. If the difference between private bank and NBFC is not big, it makes sense to invest in private bank. Upto 1 lakh is insured in private bank where as for muthoot it is not.

what is the amount you have invested?

kings said...

I have invested 2 lakh. time period 1.5 years. return offered is 13.5%. I was sure at the time of investment. but recent RBI guidelines for gold loan companies have made me little worried as it has affected their business.
they also offer doubling bond, where they double money in 5.5 years.
If it is not insured, why they use "secured" name in debentures?

WealthUCreate said...

Kings, there are two type of debantures, secured and un secured. Secured offer lower interest rates than the unsecured.
The reason for word secured is - it is backed by assets of the company. Meaning in case the company fails to repay the money to the investors, the assets could be liquidated to repay the investors.

In short- debantures come with an element of risk but do have the potential to provide high returns. The element of risk is lesser than investing in stocks. Invest only in reputed company with good rating.

Best option is to invest in MF and Debt Portion in PPF.

srinivasuambati said...

what is the defference between fixed deposits and secured deposits how is better to invest in secured bonds and what is the effect on investers when the company in financial crysis?

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