Company fixed deposits (FDs) offer assured returns, which are generally 1% to 3% higher than the interest rates on term deposits in a bank or post .office. However, here are some of the most important things to keep in mind before you rush to invest in a company fixed deposit.
If you fall in the 30% tax bracket, then post-tax returns from company FDs may not be attractive as the same may not beat the prevailing inflation. For such investors, debt mutual funds or tax-free bonds may be a better option
Corporate FDs are also not as secured. The investors’ money will, therefore, be at risk if the company is facing bankruptcy. Hence, credit ratings must be checked and preferably companies with AA or higher ratings must be selected.
Bank FDs are governed by the Banking Regulation Act, 1949, which is strictly in adherence with the RBI regulations, whereas fixed deposits mobilized by companies are governed by the provision of Section 58-A of the Companies Act 1956. Bank FDs are insured up to Rs. 1 lakhs as Corporate FDs are mostly unsecured, Risk of losing principal may arise in case of company goes bankrupt.
Investors should check the reputation and track record of the company in which they are planning to invest, by doing some research on the same or by consulting a reputed financial planner. Also, investors should diversify their investment by splitting the amount in 4 or 5 companies. Maximum exposure to a single company should not exceed 10% of the total investible funds.
If the interest amount exceeds Rs 10,000 in one financial year, the company will deduct Tax at Source (TDS) @ 10%. In case the depositor falls in zero/nil tax bracket, he must submit duly completed form 15H in duplicate every financial year in advance to avoid TDS.
Finally, before investing in any company’s fixed deposit scheme, the company’s financials, like profits earned by the company in the last 3 years and dividend track record which are mandatorily printed in the application form, must be looked into without fail.
A company fixed deposit is a relatively simple and safe investment option for fixed income-oriented investors only the above-mentioned points is kept in mind.