Precaution about Company Fixed Deposits
Due to rising interest rates, the rates offered by banks are high. Now, they have even better news from companies offering fixed deposits.
There are around 100 companies offering FD schemes currently, and most of them offer at least 1% to 4% more than bank FDs.
A three-year FD from Mahindra Finance, for example, gives 10.5%, while one from Jaiprakash Associates offers 12.50%.
Compared with this, the State Bank of India and HDFC Bank offer 9.25% and 8.5%, respectively, for a three-year FD. You don't need to be an investment expert to figure out that the rates offered by the companies are the best you can pocket and you should park some money in their FD schemes.
Some Differenence from Bank and Company Deposits
Bank deposits are covered by a guarantee from the Deposit Insurance and Credit Guarantee Corporation of India, which assures repayment of Rs 1 lakh in case of default by a bank, but there is no such guarantee for company deposits. The safety of the FD offered by companies full depends on its financial position and well being. That is why you have to be extra careful while choosing and investing your money in a company FD.
The following are few parameters the investors need to look before choosing High interest Company Fixed Deposit
Do a thorough check
Before putting money in a company's FD, try to get a rough idea about the company and its activities. "Go for listed companies as there is more information in the public domain about them.
The next thing you could do is check on the ratings for the FDs. "Go for companies which have an AAA or AA rating (for their deposit schemes).
Check the promoter's background and financials of the company. If a company has a long history and is making consistent profits and paying dividends - HDFC and Mahindra Finance, for example, then your money in its schemes will be in safe hands. Both HDFC and Mahindra Finance have a sound past track record.
Think twice before investing
This, along with their strong financial performance and strong parentage, makes them a good bet in the company deposit space. If the financial performance of a company has been erratic, and the promoters are not well known, you should think twice before investing in its schemes. A case in point is Morepen Laboratories. The FD holders of the company were left high and dry without any payments.
Illiquid and taxable
If the money you have is for use in an emergency, then company FD may not be the best investment option. If you have a bank FD, then in an emergency, all you need to do is walk across to your bank with the FD receipt and you can get your money back with no difficulty.
Sure, there may be some penalties for breaking the FD, but you get access to the funds to be used for the emergency. But, a company FD cannot be redeemed so easily. Typically, these FDs can't be broken before six months from the date of investment. If you break it even after six months, you would get 2% lower than the promised rate. Also, it may take aminimum of three to five days to get the money back.
Also, remember that interest income from company FDs is taxable. On this front, they are similar to bank FDs. It is always better to calculate the post-tax returns from an FD. For example, if a company pays 12% on its FD, your effective return will be 8.29% if you are in the highest tax bracket.
However, if you are retired or in the lower tax slab or not liable to pay tax on your income, the returns could be attractive.
In the end, as per a scheme of arrangement and compromise with deposit holders, the company gave equity shares to fixed deposit holders. You don't want to face such a situation, espe-cially if you are a retired person living on interest income from safe investment avenues.
In the current scenario, you should avoid putting money in real estate companies, as most companies in the sector have taken huge hit due to the high interest rates and slump in the economy. Even in the past, some real estate companies have been delaying repayment.
Companies offering extremely high Rates? Check why
Whenever you come across a company paying higher interest rates, try to find out why the rates are so high. Put simply, a company should have some reason to pay a higher interest than the prevailing market rate to depositors.
Most often, you would find out that the company is paying a high rate because it is in some financial trouble and the higher rate is a way to compensate investors for taking the high risk of putting money in its scheme.
Ask for appropriate justification from distributors and financial advisors and even from company. If you are convinced with the reply, you can put money in the FD.
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If your fixed income portfolio is worth Rs 50 lakh, for example, then Rs 5-6 lakh could be invested in company fixed deposits. It would be better to spread this amount across at least four to five companies.
If you are retired and depend on interest income to meet your day-to-day expenses or your monthly liabilities, the money should go into only AAA or AA-rated companies. It would not be worthwhile to chase an extra 1% to 3% return at the cost of safety.
Finally, opt for cumulative schemes to maximise your returns, as the interest earned would be automatically reinvested at the same coupon rates, which will generate better yield.