Are you planning to buy any company fixed deposit schemes in near future? If your answer is yes, you must know important facts & features about the company FDs.
Company fixed deposits are offering a reasonably higher interest rate than any bank fixed deposits.
E.g. Bank FDs such as SBI fixed deposits with 1-3 year maturity offers an interest of 8.5 per cent. At the same time, company fixed deposit offers considerably high interest rate, which is usually in the range of 10.25-11 per cent.
However, don’t just get swayed by interest rates alone. There are a lot of factors that need to be considered before you invest in a company fixed deposit scheme.
Company fixed deposit Scheme – 10 Important Things
Let’s discuss about 10 most important features of company FDs which you need to analyze before you take your investment decision.
Credit rating: Every company fixed deposit has to go through a rating process where agencies such as ICRA, Crisil, CARE etc. provide ratings on the company FDs. The credit rating is a measure of the company’s ability to pay the interest as well as principal to its investors. A high rating means no or very low probability of default.
For example, DHFL is rated AAA by CARE. This rating indicates that it has the highest degree of safety with timely servicing of financial obligations. Thus it carries the lowest credit risk. Similarly, HDFC is rated MAAA by ICRA and FAAA by Crisil. Both these ratings indicate the highest credit quality and the lowest credit risk for the fixed deposit scheme by the companies.
Company Background: Before investing in the corporate FDs, always check the background and the business of the company. Try to find out the company’s repayment record, promoters’ history, its financial aspects such as losses, debts etc. A company with a low credit rating is likely to offer higher rates to woo the investors.
Liquidity: The lock-in period of a company deposit determines the liquidity of the product. Liquidity means how easily you can withdraw your money. Most of the deposit schemes have an initial lock-in period of 3 to 6 months. And the interest rates earned may be lesser than that of withdrawal on maturity
Interest Rates: Generally the interest rates of the fixed deposit schemes offered by a company are higher than regular banks. This is definitely one of the major reasons that many people are interested in these schemes. But if a company is offering very high rates suppose 15% pa, then it is advisable to be little cautious.
Longer the duration of the investment, higher will be the rate of interest offered on any Company FD.
Term: The term of the company fixed deposits are generally less. In case of these FD schemes, the performance of the company and rating may change with time. So try to keep shorter terms to minimize risk. The term as regulated by RBI should be minimum 12 months & maximum 5 years.
Special Benefits: There are few special benefits in some of the company fixed deposit schemes. Many company FD schemes offer special interest rates for the employees of that company, Share-holders, Senior Citizens etc. It is advisable to go through these details to avail these benefits.
Premature withdrawal: Most of the company Fixed Deposits Schemes have lockin period of at least 3-6 months. They also levy some penalty charges for premature withdrawals. Corporate FDs can be broken by paying a penalty of 25-50 bps. For that one needs to write to the issuer directly and request for premature withdrawal.
For premature withdrawal, the commission is payable for the period completed and excess commission paid will be recovered from the deposit amount.
Taxation Rules: Taxation rules for any corporate FD is similar to that of a bank FD scheme. The interest earned is added to the individual’s income & is taxed as per the individual’s slab rate. TDS is not applicable on interest earned up to Rs 5,000 pa limit. One needs to club the interest earned on these deposits as income from other sources and file the annual Income Tax Returns.
Types of Schemes: Company FD schemes are of two types -Cumulative and Non-Cumulative schemes. In case of Cumulative Deposit scheme, the interest is paid along with the principal amount on the maturity date. Whereas, the interest amount is paid periodically under non-cumulative schemes.
People like freelancers or retirees, who need regular additional income, can opt for periodic interest payments (monthly/quarterly/half-yearly/yearly). Benefits from fixed deposits with cumulative interest rates are significantly higher as the interest paid is again put back into the account and the depositor can avail the benefit of compounding.
Insurance & Security: The corporate fixed deposit schemes are not covered under any Insurance benefit like the bank FDs. All the bank deposits such as savings, fixed deposits, current and recurring are insured up to Rs 1 lakh. Default is always a matter of concern for company FDs. So it is important to know the risk that all the investors may face.
Fixed deposit schemes are always a preferred investment option in India. And if you want to invest in company fixed deposits, then it is always better to put your money in few good schemes instead of investing the whole amount in a single one. This will help you to become an intelligent investor & differentiate from an average one.
Company Fixed Deposit Schemes are mostly suitable for those investors who are comfortable with taking some amount of risk. Unlike bank FDs, these instruments are little unsecured and are not governed by the Reserve Bank of India. The chances of default also will remain, so investors need to complete the necessary investigation before selecting any company for investment.
This is guest post written by Mr.Santanu who runs mydailylifetips, a personal finance blog.