The Real Face of Company Fixed Deposits

These days, there has been a lot of talk around the street and every debt investor is considering company deposits as an investment option. There are reasons behind this rationality. Fixed deposits rates offered by various public sector banks is 6-6.5% per annum which is often called bank fixed deposits where as private companies are offering 8% per annum to its investors. Interest rate on fixed deposits mainly depends on the RBI policy rate actions and the riskiness of the sector to which the company is belonging

As a financial planning advice, one should not blindly get into fixed deposits offered by these companies . One must understand the various risk factors associated with this investment instrument.

What is fixed deposit offered by Companies

The companies offer fixed deposits products in order to build a capital for the company in long term when the company needs capital for its expansion plans that may be foraying into some other sector which may prove risky for the company and its investors. Generally, the interest rates of fixed deposits offered by companies are high as compared to bank fixed deposits interest rates.  The interest income is paid on a monthly/quarterly/half yearly/yearly basis or on the maturity of the fixed deposit. As interest incomes are paid on a monthly or on quarterly basis in most of the plans, which means there won’t be any capital or principal amount appreciation.

One school of thought says that fixed deposits are meant for conservative investors who have low risk profile but investing into company deposits requires some research and due diligence just like you need some research to be dome before buying a stock of any company.

Benefits of investing in Company Fixed Deposits

  • High Interest Rates as compared to other debt products
  • Lock in period of only 6 months for most of the companies
  • No TDS is deducted when interest income earned by an individual in a financial year is less than Rs 5000
  • Investor has the option to diversify his portfolio in fixed deposits offered by companied belonging to various sectors to diversify his risk

Are Company Fixed Deposits risky?

In simple words, unlike the bank fixed deposits, there is an element of risk attached with this instrument. Higher the rate of interest offered by the company fixed deposit, the higher would be the risk attached with this investment option. These company deposits have only got a reputation or public image which assures the investors of the future payments in terms of interest and the principal amount.

Tax Implications

Interest income earned by company fixed deposits is taxable. So it becomes lucrative option for investors who comes under 10% tax bracket as compared to individuals coming under 30% tax bracket.

Finally, Is it for you?

It all depends on the risk profile of any investor. But from the brief analysis which we have done, we can make out that one should not have more than 10% asset allocation to company fixed deposits for a individual who have high or moderate risk. There is also a need of diversification by spreading risk by investing fixed deposits under 4-5 companies. Secondly, one must check the Credit rating of the fixed deposit. It is a very important indicator which highlights the underlying risk of the company. It shows the ability and willingness of the company to pay its debt obligations in time in the form of principal and interest payments. CRISIL and ICRA are always one of the preferred rating agencies by institutional investors. AAA rated instrument shows highest level of safety followed by AA and A. Generally AAA rated instrument will have least rate of interest as compared to a instrument which is rated lower than that.