August 16, 2022
Company Fixed Deposits Risks and Rules to know before Investing

Company Fixed Deposits Risks and Rules to know before Investing

Investing in Company Fixed Deposits

Currently, most of the banks are offering interest rates on fixed deposits in the range of 6% to 7%. Although fixed deposits with the banks are safe, post-tax returns of the bank sometimes do not even beat the inflation rate. So it is a must for the investors not to stick with the traditional investment philosophy and to look for better returns.

But Investing in the stock market or mutual funds is not everyone’s cup of tea. You need to know various guidelines for selecting better mutual funds to garner healthier returns. Direct equity investment is not at all suggestible to the newbie so sticking with the safe investment avenue with better returns than the bank fixed deposit is the need of the time.

This is the scenario where Company Fixed Deposits fits appropriately. The company fixed deposits are very popular among the investors having low risk-appetite such as senior citizens who cannot afford to earn less but cannot afford to lose money at any cost.

Company fixed deposits offer interest rates which are generally higher by 1% to 3% in comparison to the bank fixed deposits for a similar tenure. Similar to bank fixed deposits, company fixed deposits also offers various options of interest payment such as monthly, quarterly or yearly. However, company fixed deposits offer attractive returns but it comes with some inherent risk which one needs to keep in mind while investing. Following are some of the risks and rules which one should follow before investing your hard-earned money.

Risks of Investing

Security

Bank Fixed Deposits are secured up to ₹ 1 lakh i.e. in case the bank is not able to pay your principal along with the interest than you will get the same through RBI subject to a maximum of ₹ 1 lakh. The same rule does not apply to the company fixed deposit. This is the main reason for higher interest rates offering by companies.

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Post-Tax Returns

Since no benefit of taxation is provided in case the money is invested in Company Fixed Deposits, the interest rates post-tax is a dampener. In case you fall in 30% tax bracket then the post-tax returns may not be at all attractive and same may be equal to the prevailing inflation rate. For such investors’ tax-free bonds, debt mutual-funds are a far better option.

Default Risk

Company Fixed Deposits carry an inherent risk called Default Risk. Such risk may occur due to the premature withdrawal of deposits by investors at bulk. This early withdrawal may result in a cash-crunch situation and prejudicial to the health of the company on-going operations. If the company is going through stress either due to global slow-down or any other reason, it becomes hard to overcome from this situation and company may default in processing interest and principal payment. Inability to recover money from its debtors may also result in a similar situation. Thus it becomes very important to understand the financial position of the company prior to investing.

Regulations

RBI is the governing body of Bank which is regulated by the Banking Regulation Act 1949 which safeguard the interest of the investors. However, Company Fixed Deposits are governed by the Companies Act, 2013, which puts debenture holders and preference shareholders in the top positions to get the payments at the time of winding-up of the company.

Company Track Record

Investors should not blindly fall in love with the company due to the higher interest rates as it says “Higher the Risk, Higher the Returns”. Investors should thoroughly check the past history of the company namely the track record of payment of the interest and principal, payment of statutory dues on time, payment of the NCD’s, etc. In case you are unable to track the same, consult some reputed financial planner.

Recommended Read Tax on Non-Convertible Debentures in India

Rules of Investing

Pre-Closure Penalty

Company Fixed Deposits mostly do not entertain pre-mature closure of the deposits before 6 months. In case the deposits are broken and withdrawal is made before the maturity, the company levies a penalty. Further, the premature withdrawal of the company fixed deposits is a tedious job and may require lots of documentation.

Diversification

As it says do not put all your eggs in one basket, similarly, investors should not invest all the money into the one fixed deposits. The investment should be diversified by splitting the investible amount into 3 to 4 companies. The maximum investment in the single fixed deposits shall not exceed 10% of the total savings.

TDS Deduction

TDS @ 10% is deducted on the bank interest if the interest for a particular financial year exceeds ₹ 40,000, however, the TDS is deducted on the interest earned from company fixed deposits if the amount exceeds mere ₹ 5,000. In case the investors have zero tax liability then he must submit Form 15G / Form 15H as the case may be to avoid the tax deduction on the interest earned.

Nominee Details

An investor should mention the nominee details at the time of investing who should receive the deposit amount in case of unfortunate event. The nomination should be done because it serves the purpose of investing. As an alternative, the deposits can be done on a joint basis with the spouse, major child, etc.

Ratings

Rating agencies like CRISIL, CARE, and ICRA provide ratings to the fixed deposits of the companies based on the several factors like financial health, past history, nature of the business, etc. It becomes utmost necessary to look at the ratings and go with the highest rating i.e. ‘FAAA’ or ‘AAA’ to safeguard the investment.

Currently, there are many instances where companies delayed the interest payment and principal payment on the Fixed Deposits, so it becomes utmost necessary to look into the complete details before investing. The application forms should be thoroughly read and understand because the rules relating to premature withdrawal, companies dividend record, profits, sales, etc. are mandatory to be disclosed in the application form. Finally, it can be said that companies fixed deposits are relatively better investment option if done with the precaution.

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