Investing in risky assets is not a wise proposition if you don’t have time and mental bent for research. Normally investors who invest in risky assets like stocks and derivatives have very high return expectations. In real sense sometimes these expectations are highly unrealistic which leads to the fall of a larger percentage of risk loving investors. If stock market has given a historical return of 15 to 20% expecting 40% return out of it on continuous basis should be categorized as highly unrealistic. So if you are risk averse and don’t have enough knowledge and time and you want return in the range of 8 to 15% (15% return is quite competitive with respect to stock market returns), what are the options available with you? If you are willing to roll your sleeves up and do a little bit of analysis, Company Fixed Deposits can prove good alternative for you.
What are Company Fixed Deposits?
Company fixed deposits are similar to the famous bank deposits, but in this case, deposits are managed by a corporate firm which is not a bank. It can be a NBFC, listed public limited company or private firm. The main difference between Bank’s Fixed Deposit and Company Fixed Deposit is the loan guarantee of up to Rs 1 lakh given by RBI against Bank Fixed Deposits. Company Fixed Deposits are not secured by RBI and hence they are risky as compared to Bank Deposits.
Pros and Cons of Company Fixed Deposits
| The Good | The Bad |
| · Higher Interest rate (9% to 16%) as compared to Bank Deposits (9 to 10%) · These are short term deposits (Ranging from 6 months to 1 year) · Income tax is not deducted at source if the interest income is less than 5000 · Deposit can be spread in more than one company so as to keep the interest income lower than 5000 from each of them to avoid tax deduction at source | · Company Deposits are not Secured by RBI as done for Bank Deposits · Procedure of foreclosure is complex and not smooth. Guidelines may vary from company to company · Possibility of default of payment by company is high as compared to Bank Deposit · Proper research needs to be done before choosing a company for investment |
Risk Analysis
Company Fixed Deposits are exposed to default risk as, at maturity, the company might not be in a position to repay the accrued amount. There might be various reasons like bankruptcy, fraud, cash crunch due to loss etc. These loans are not secured by RBI as done for Bank Deposits so investors do not have insurance of even Rs 1 Lakh.
Who Should Invest
As there is a default risk involved and these deposits sound risky, before you plan to invest you need to take out some time for research. It’s not that you reject this option as a whole but do some analysis to find out the good option as the effort is worth it (you will get superior returns 11 to 14%). Please find below some of the checks which you should apply before choosing a company fixed deposit:
- Company deposit rating by rating agency like ICRA, CRISIL and such.
- Financial health of the company – Profit, Debt, EPS and such parameters should be in good shape.
- Dividend Payout history of the company – It should have a healthy history of dividend payments.
- Promoters History.
- Companies Management capability.
- Overpromising rates – people should avoid deposits which are offering return above 15%.
Conclusion
If you are comfortable with doing a little bit of research, Company Deposits can be promising investment options. Basic rule is to go with renowned names with proven track record. It’s not advisable to be invested in long term deposits as default risk increases with tenure. Enjoy the new armor in your kitty.
Author
The author Bimlesh Singh is a financial consultant and is the lead partner at Vertical Grass, a company with the mission of providing personalized financial services. He can be reached at bimlesh@verticalgrass.com.