Fixed deposits are always first choice for most of investors. Indian investors look for fixed deposits for safe investment. In recent time, even the interest rate of the fixed deposit has gone up because of high repo rate in the country.
Corporate fixed deposits are normal fixed deposits offered by Companies. The interest rates offered are generally higher than Bank interest rates and can be in range from 9%-16% . Higher the interest rates offered higher are the risks involved. Companies float fixed deposits for various reasons. Like, expansion of the company, pay off debts or to overcome severe cash crunch. It is an easy way to generate money and they don’t issue new share capital but they raise money through this.
Corporate Deposits are governed as per Section 58A of Companies Act, however these are “unsecured” loans.
- There are few risks which are involved in company fixed deposits.
Default risk: These Company deposits carry a risk called Default Risk, which means, at maturity they might not be able to return your maturity amount and default in the payment. It can happen that company is out of cash at that time or does not have sufficient money in their hand to pay back.
- Security risk: Bank Deposits are secured by RBI up to 1 lacs rupees per branch, which means that if bank does not return you the money or goes bankrupt, RBI will pay you up to 1 lacs of deposits. There is no such Insurance on Company Deposits, hence they are totally unsecured.
there are few merits and demerits about investing in the company fixed Deposits.
- Generally tend to offer higher interest rates
- Lock in period is 6 months
- Investor can diversify the amount in different companies and can diversify the portfolio for higher return and minimize risks.
- They come with high risk as they are not secured by any assets.
- Company FD have no deposit assurance as bank FD’s up to Rs.1,00,000 per individual your deposit are protected.
- Interest above Rs 5000 will be subject to tax deduction at source
- Pre-mature withdrawal of FD’s is not easy and difficult to liquidate.
Things to be remembered before investing
- Avoid companies offering interest rates above much higher than bank deposit rates
- Check for the companies interest pattern, if irregular avoid it
- Check with rating of the company provided by Fitch and others (AA or AAA scheme)
- Check for the financial performance of the company
- Ideal investment period should not be more than 3 years.
- Companies whose Balance Sheet shows losses
- Pvt limited Companies and Partnership firms as its very difficult to judge their performances.
An investor should check the company efficiently if the corporate fixed deposit offers by the company id 3% more than bank fixed deposits.
Unless you need income regularly, you can opt for the cumulative schemes to regular income options since the interest earned automatically gets reinvested at the same coupon rate, giving you higher yields in the process.