These days investors can choose from a slew of options to grow their income, with bank fixed deposits (FDs) being among the safest and smartest choices. Fixed deposits are a beginner-friendly way of putting one’s otherwise idle income into an instrument that will gradually grow to give the investor passive income in the form of interest on their investment. However, there is another type of fixed deposit that can offer investors higher returns than the standard fixed deposit. This is called the company fixed deposit.
Company fixed deposits have become quite popular in just a few short years. At times, they serve as a more lucrative option than public or private sector bank options. Primarily, company fixed deposits investments are a viable option for those who wish to earn a higher interest on their investment. However, due to the fact that they offer higher returns, the risk associated with company FD investments are higher as well. Here are some features of a company FD.
Features of a company FD
Some key things that differentiate a company FD from a standard fixed deposit are as follows:
Higher Interest Rate: Company fixed deposits offer a higher interest rate than a standard fixed deposit. This makes them an attractive investment option for many investors.
Taxation: TDS or ‘tax deducted at source’ is applied to company FDs if one’s interest earned crosses ₹5000. In the case of a bank FD, this tax is only deducted if the interest earned crosses ₹10,000.
Flexibility of Tenure: Similar to bank FDs, company fixed deposits also offer investors the flexibility to remain invested for the duration that suits them best.
Are company fixed deposits investments safe?
The short answer: yes, but you need to do your research. Company FDs are riskier in comparison to standard bank fixed deposits. This is for a few reasons. There are no assets of the company offered as collateral to investors who put their money into its fixed deposit scheme. In case the company defaults, investors may not get any of their funds back. The chances of a company defaulting on one’s payments and principal amount to its investors also increase when the company is not secured by keeping its assets as collateral.
This is why investors who are considering company fixed deposits as a potential investment should do a proper background check of the company they wish to invest a fixed deposit with. Since it is your own money that is going towards a company, you should take precautionary measures. Do not rush into your investment. Do a thorough check of the company’s background. This includes their past financial performance and customer service, in addition to their general background and products. It is a good idea to look at the board of directors and promoters of the company.
You will also need to add safeguards like ratings of the company’s fixed deposits. This can be done by checking the rating of the company with financial institutions like ICRA and CRISIL. These institutions offer ratings for the company and their FDs giving you a direct estimate of how efficient the company has been with its prior payments. Ideally, a rating of ‘AAA’ indicates that investing with the company is probably safe. As the rating lowers, the risks increase, so tread with caution.
If you are convinced to invest in a company without a AAA rating, consider a shorter-term FD. This is the advice given by financial experts as a means of mitigating the potential for loss. In case the company underperforms, you can always choose another company to invest with. If you select a long term company FD you could be stuck with an underperforming company that is not paying you your interest and principal amounts. If that company were to go bankrupt, you would lose a huge investment.
Conclusion
Ultimately, company fixed deposits are risky investments. They offer a higher rate of return to investors but offer no collateral and can turn into losses if the company’s performance tanks. There are many ways investors can be careful about their company FDs to mitigate risk. This includes doing a background check of the company and looking at its rating on reputable sources like CRISIL and ICRA. As with any investment, before going in for a company fixed deposit, carefully look at any policy documents. This includes your application form, any information pertaining to your deposit, and financial statement form the company.
