Are Company Fixed Deposits Safe?
5 years bank fixed deposit is one of the investment options under Section 80C which most of you have utilized. But here we talk about one more investment option which does not give you any tax benefit but the rate of return of this investment is far superior from the rate of return given by banks.
High Risk results High Rewards
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What are Company or Corporate Fixed Deposits?
Company Fixed Deposits are almost same as Bank Fixed Deposits, offered by the Companies. The rate of return offered on Company Fixed Deposits are way higher than Bank Fixed Deposits ranging in between 9% per annum to 16% per annum. Section 58A of Companies Act governs the Deposits to be accepted by the Companies.
Why do Companies pay this much Rate of Return?
Most of the Companies which are not in favour of raising money through issuing shares chooses Fixed Deposits route to meet the Financial Crunch. The time period of these deposits makes it more alluring, which is of 6 months to 84 months.
Risks Associated with Company Fixed Deposits:
- Default Risk: At the time of redemption the company sometimes unable to payout, this type of risk is termed as Default Risk. It can happen that company is out of cash at that time or does not have sufficient money in their hand to pay back , this can happen for many reasons like their business might not be going good that time or because of recession .
- Unsecured Deposits: These deposits unlike bank deposits which are backed by RBI upto Rs. 1lac, are not secured means in case company is not able to pay you at the time redemption you cannot get back even a penny, all you can do is to file a complaint with MCA or CLB.
- Tax Inefficient: Interest earned on 5 years bank fixed deposit is not taxable but any interest earned from the company fixed deposit is fully taxable.
- Premature Exit: Premature Exit from Company FD’s is not that simple like Bank FD’s. You might have to run from one place to another and send loads of letters and sometimes even give reasons for Premature Withdrawals.
What to look for before going for Company Fixed Deposits?
- Credit Rating: Make sure you also consider the credit ratings given by CRISIL and ICRA for that FD. (Understand CRISIL Ratings and ICRA Ratings)
- Share Price: One must analyze the share price, do not invest in highly fluctuating shares.
- Management: Competent Management assures your return, so before going for investment try to find out who is behind the company operations.
- Past Records: The company who is paying dividend on shares and interest on deposits regularly must be selected for investment.
Which Company Fixed Deposits you should avoid?
- Companies which offer rate of return higher than 15%.
- Companies which are not paying regular dividends to the shareholder
- Companies whose Balance Sheet shows losses
- Companies which are below investment grade (A or under) rating.