Company Fixed Deposits-Think Before You Invest

Last Updated : June 3, 2016, 6:37 a.m.

When it comes to company fixed deposits (FDs), it would not be wrong to say that they are considered as a very popular investment option, especially among senior citizens. Yes, just because they give assured returns which are usually 1% to 3% higher than the interest rates being provided by the banks for the same period. These days, there are plenty of company fixed deposit schemes which have the option of paying the interest on monthly or quarterly intervals.

However, one thing that needs to be mentioned here is the fact that as company fixed deposit continue to grab the attention of many investors, but there are also some risks involved. Yes, you read that right, thus you need to be very careful before putting your hard-earned money in it. Thus, no matter how lucrative a company’s FD is, you must keep these below points in mind before investing in company fixed deposit .

Unattractive Post-Tax Return
Company fixed deposits grab the eyeballs because of the high rate of interest that they offer as compared to the FDs being provided by public as well as private sector banks. Moreover, if you fall under the 30% tax bracket, the post-tax returns from the company FD may not be attractive because the same may not beat the prevailing inflation. Thus, for such investors, the better options are- tax-free bonds or debt mutual funds.

Investment Security
As compared to bank FDs, company fixed deposits are not secured. For example the bank FDs give security up to the investment value of Rs 2 lacs, which is absolutely not the case with corporate FDs. The money of the investors will be at risk, if the company is going through bankruptcy. Hence, it is one of the major reasons why company FDs have high rate of interest as compared to the bank Fixed Deposit.

Default Risk

Company FDs carry a risk which is commonly known as default risk. Moreover, it may occur, in case of pre-mature withdrawal of the deposits by the investors which finally leads the company towards the cash-crunch situation. Besides this, if a company is going through rough phase, it won’t be able to return the maturity amount, and may default in the payment. Therefore, it is highly important for all the investors to know the liquidity situation of the company before investing in company fixed deposit.

Regulations

When it comes to Bank FDs, they are governed by the Banking Regulation Act, 1949 which is strictly in adherence with the regulations of RBI. While on the other hand, company fixed deposits are governed by the provision of section-58-A of the Companies Act, 1956. As per the Companies Act, if any company is winding up, it should give the first preference to the equity share holders in the payment despite giving the preference to fixed deposit holders, which in itself puts company FDs on higher risk.

Pre-Closure of Deposits
Many company fixed deposits don’t allow the pre-mature closure before 6 months. When it comes to the withdrawal of the investment before maturity, the investors need to pay the penalties. Not only this, this process also requires lot of paperwork, hence is a tedious task. Whereas, in case of bank FDs, the penalty also needs to be paid by the investor for the early withdrawal, but you are free to close the deposit anytime.

Track Record of Company
You should not get attracted towards the high fixed deposit interest rates, but you also need to check the reputation as well as track record of the company in which you are planning to invest. You can do so with the help of doing the thorough research or taking the advice from a professional financial planner.

Diversification of Investible Funds
According to the experts, the investors should not invest a bigger chunk of their surplus funds in just one company fixed deposits scheme. You should always diversify the same by splitting the amount to at least 4 to 5 companies. The maximum exposure that you should give to a single company should not be more than 10% of the total investible funds.

TDS Deduction
In one financial year, if the interest amount exceeds Rs. 5,000, the company will deduct the TDS at 10%. However, you fall in the nil tax bracket, you need to submit the duly completed form 15H every year in advance so as to stay away from the TDS.

Indicate the Name of Nominee
When you invest in company fixed deposit, the investor must need to indicate the name of the nominee who is going to receive the deposit amount when an unfortunate event occurs before the maturity date. In addition to, from an alternative perspective, it would be advisable to have a joint depositor so as to have the safeguard against any eventuality.

Study Application Form in Detail
Before you invest your hard earned in any company FDs schemes, it is very important to read the application form in detail in order to know the rules relating to the premature withdrawals and many more things. Not only this, in fact the financials of the company such as profits earned in the last 3 years along with the dividend track record must be considered before you start investing in company fixed deposits.