A Corporate Fixed Deposit (FD) is an investment in a company for a fixed period at a prescribed rate of interest. Manufacturing, State Governments, Financial and Non-Banking Finance Companies (NBFCs) raise capital via such deposits on a regular basis as these are , though higher cost, a well distributed and stable source of funds.
PL offers a range of Corporate FDs varying in tenures, interest rates and institutions to suit your investment needs with our focus typically on AAA and AA-rated fixed deposits of varying tenures.
We present below some factors that need to be considered before you invest in a company fixed deposit scheme – do of course ask us for details on any deposit that interests you and our FD division will help you out!
The New Companies Act 2013, which came into effect in April 2014, has made compulsory for companies to get themselves rated in order to be eligible to raise money through fixed deposits. Fixed deposit schemes are graded by credit rating agencies such as Crisil, India Ratings, Fitch, CARE and others. Checking the ratings is the first step towards selecting a company fixed deposit scheme. A high rating indicates the highest degree of safety vis-a vis timely servicing of financial obligations, a very important piece of information as you are effectively lending to a company whose working or strengths you may not be aware of.
Crisil prefixes its fixed deposit ratings with ‘F’. According to Crisil, a ‘FAAA’ rating denotes highest safety and “indicates that the degree of safety regarding timely payment of interest and principal is very strong.” ‘FAA’ means high safety, and “indicates that the degree of safety regarding timely payment of interest and principal is strong. However, the relative degree of safety is not as high as for fixed deposits with ‘FAAA’ ratings.” As you go lower in the rating chart, the degree of safety reduces substantially
Do a little bit of research on the company via stock recommendations freely available on the internet apart from articles and news on the company you are investing into. Always check the group background and the promoters quality you are investing with. Remember that a company with a low credit rating is likely to offer higher rates to woo investors which could be highly risky.
The lock-in period of a company deposit determines how liquid the product is, that is, how easily you can get your money back. Most deposit schemes have an initial lock-in of three to six months. If one wants to withdraw prematurely, before the date of maturity, the interest payable will often be 0.5%- 1% lower than the interest applicable for the period for which the deposit has been maintained.
Company fixed deposit schemes can pay interest monthly, quarterly, annually, half-yearly and cumulatively. Those who need regular additional income—freelancers or retirees— can opt for periodic interest payments. However, benefits from fixed deposits with cumulative interest rates are considerably larger as the interest paid is ploughed back into the deposit account and the deposit holder benefits from compounding.
Risk Vs Bank Deposits
Most bank FDs offer lower interest rates compared to company deposits, but they are by far less risky than the latter given the nature of the two. These deposits are basically unsecured loans that do not guarantee anything to the investor in case of a default. It is because of this risk that these deposits come with higher interest rates compared with bank FDs. In addition, senior citizens can often earn 25-40 bps more than the normal rates on offer.
However, remember that technically, in the extreme eventuality that a bank does fail, your deposits are insured only up to Rs 1 lakh per bank by the Deposit Insurance and Credit Guarantee Corporation.
Interest earned on both, bank and company deposits will be taxed according to the income tax slab you fall under. Therefore, those in the highest tax bracket, will pay more tax. According to the Income-tax Act, 1961, tax will be deducted at source (TDS) on the interest earned from a bank FD if the interest exceeds Rs 10, 000 a year. For company deposits, the limit is Rs 5,000. You can save on TDS by submitting Form 15G (or Form 15H for senior citizens).
Risk-averse investors should stick to safer options like the bank FD and small savings schemes for their fixed income needs especially if the amount is lesser than Rs 1 lakh. Choosing a company deposit can add to returns for sure but a little bit of more research may be required or alternatively, you may call / email us for our recommended FDs.