Financial Companies and Non-banking Finance Companies call the public to invest with them for a fixed time, carrying a prescribed rate. Company Fixed Deposits are like your deposits with banks with a difference. These are lucrative options for companies to expand in the face of the difficulty in procuring bank loans for their entrepreneurial expansion. Herein, you come in and put your money with their companies. The Companies Act under Section 58A governs the aforementioned deposits. The lure of higher returns is capable of pushing many towards Corporate Fixed Deposits moving them away from safer pastures, in spite of the risks involved in the former.
[source : Fundsindia]
Benefits and More
Company Fixed Deposits offer a higher interest rate than those offered by bank fixed deposits. They provide higher rates because no there is no guarantee, unlike bank fixed deposits. The safety depends upon the financial health of the company. The difference is almost of 2-3 %. If the interest yields less than Rs 5,000 in a year, there will not any TDS (Tax Deducted at Source). If not, you can spill your investment in multiple fixed deposits. This can be a simple way to have more gains.
These are unsecured debts, i.e., in case of default, you do not get back the funds by selling your documents. Registrar of Companies regulates the non-banking finance companies, but you still have the risk of losing your money. There has been past instances when a company offering a high interest has defaulted. However, in such instances with banks a compensation of Rs 1 lakh is given. In fact, many known names in the market have failed expectations a couple of times. However, the buzz about these private companies giving poor re-payments does not make it a bad investing option at all.
Quick Research Helps
You can minimize the risks involved by doing a thorough research on the companies before any kind of investment. Check the history of the company dating back to 10-15 years. Look out for the success rate in repaying on time. Rating agencies provide ratings on particular offerings. Thereby, invest only in companies having AAA or AA ratings.Different rating use different style of credit formats as shown below. Credit ratings may use (+), (-) to indicate comparative standards. Avoid the companies without rating or low rating. For further assistance, take the help of a financial advisor. Check on the credibility of the promoters of the company. Avoid the ones with a dubious record.
Things to Remember
Sectors involving, high risks like real estate and microfinance, are better avoided, and be skeptical of companies which provide exceptionally high rates of interest. Unless you need a regular income, prefer cumulative schemes for the interest earned at same coupon rate, will yield you better returns. Usually, if you invest in companies for a longer time, you will get higher interest but to get comfortable with the investing on corporate fixed deposits, you can kick start with shorter periods. This lessens the risk factor and strikes a balance between risk and returns. In case your company defaults, you can lodge a complaint with the Reserve Bank of India.