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Should i invest in Company Fixed Deposits?

Company Fixed Deposits
Company Fixed Deposits

Should i invest in Company Fixed Deposits? is one of the most commonly asked question by my readers. As the name suggests, Company Fixed Deposits are Fixed Deposit schemes offered by companies / corporates. Company Fixed Deposits are fast becoming very popular debt investment option. Reason for this popularity is Higher Rate of Interest. Company Fixed Deposits offer interest rate in the range of 9%-11.5% when banks are offering interest of 8.5% on Fixed Deposits. Fixed Deposits is one of the most popular savings / deposit scheme in India because it provides stable and fixed income with safety of principal amount. Unfortunately safety of principal amount is not assured in Company Fixed Deposits. Unlike Bank FD’s it is not feasible to manage Company Fixed Deposits online. Only few companies provide option to invest online. On liquidity front, if you opt for premature withdrawal of Company Fixed Deposits then it might take 4-6 weeks with penalty on rate of interest.

Company Fixed Deposits are more suitable for a depositor who is willing to take extra risk for higher returns. Returns are directly linked to Risk factor. AAA rated Company Fixed Deposits offer interest almost equivalent to Bank FD’s. Logically it doesn’t make sense to invest in AAA rated Company FD’s. A word of caution, you will find lot of Company Fixed Deposits without any credit rating. As a thumb rule, remember that only riskier options offer higher rate of interest to depositors in comparison to bank FD’s. In layman terms, Higher the Rate of Interest offered Higher the risk Attached. It is advisable not to invest in Company Fixed Deposits rated below AA or with No Rating assigned. Even if you are willing to take risk and depositing in such schemes then you should always deposit for shorter durations like 6 months or Max 1 year. Now you must be wondering why, i will discuss later in this post. Lastly, Don’t put all eggs in one basket. You can invest smaller amounts spread across Company Fixed Deposits e.g. 1 lakh can be invested in 5 different Company FD’s of Rs 20,000 each. It will hedge your risk.

Why companies offer Fixed Deposits?

Answer to this question is very simple

(a) Cheap source of fund: When any company or corporate need funds, lending rates are commercial lending rates / Corporate lending rates. Currently it is between 13%-18% but may go upto 23%. Corporate lending rates vary from company to company but on an average it is approx 16%. On other hand, rate of interest on bank fixed deposits is almost half i.e. 8.5%. Now companies take advantage of this situation and offer mid-way rate of interest in the range of 10%-12% under Company Fixed Deposits. For companies, its cheap source of fund because if they borrow at corporate lending rates they have to shell out 16% interest. At the same time it is also beneficial for depositor as he is getting approx 2.5% higher rate of interest say 11% compared to bank fixed deposits. In short, Its a win-win situation for both company and the depositor.

(b) Depositor’s Psychic: Companies play with depositor’s psychic by suffixing “Fixed Deposits” to Company Fixed Deposits. For Indian depositor “Fixed Deposits” means safe & secure with trust factor. Till date, there is not even a single case of default on Bank Fixed Deposits. Depositors are not aware that Bank Fixed Deposits of upto 1 lakh are insured by Deposit Insurance and Credit Guarantee Corporation. In worst case scenario if bank goes burst, Depositor know that govt is there to bailout the bank / depositors. We have numerous examples like Global Trust Bank, Bank of Rajasthan, Centurion Bank of Punjab etc. Whereas Company Fixed Deposits are unsecured loans and there is no insurance / guarantee in case of default by the company. Govt will not bailout in case there is a default on Company Fixed Deposits.

(c) Ease of Raising fund: Company Fixed Deposits is one of most easiest & convenient way of raising fund by the company as it is unsecured loan.   

Company Fixed Deposits – Imp Points

(a) Tax: Company Fixed Deposits are taxed similar to Bank FD’s. Interest earned is full taxable at marginal rate i.e. as per income tax slab of the depositor. It is more beneficial for depositor in lower income tax bracket to invest.

(b) TDS: Another disadvantage compared to Bank FD’s. For interest income of more than Rs 5000, TDS is deducted in Company Fixed Deposits during FY whereas this limit is Rs 10000 for Bank FD’s.

(c) Listed Companies: Preference should be given to FD’s of Listed companies as you can check financial details and you can have fair idea why the company is raising funds.

Why Company Fixed Deposits are Risky?

Recently one news which went unnoticed was that JP Associates withheld principal amounts of Fixed Deposits issued in 2012. Company has a huge debt burden of 60,000 Cr and is struggling to pay debts by disposing its assets. Anyone who deposited in 2012 never thought that JP Associates will default on principal amount. The point i am trying to make is that in India Business environment is very fragile. It is dependent on Governments Policies, Regulatory Framework & stiff Competition. Within a matter of seconds, a gem in crown can become dust. We have numerous examples like Air Deccan, Spice Jet, FTIL (Financial Technologies), SKS Microfinance, JP Associates, Aircel, Uninor etc. These companies were quite promising at one point of time but then underwent deep pain / crisis due to various reasons.

Therefore i suggest that if you wish to invest in Company Fixed Deposits then it should be only for short duration like 6 months to max 1 year because of fragile business environment.

Indirect Exposure through Debt Mutual Funds

I do agree that we cannot ignore this investment option completely because of higher rate of interest. To hedge risk, in my opinion we can invest indirectly in such schemes through Debt Mutual Funds. These debt mutual funds, invest in Company Fixed Deposits after due diligence. Moreover even if the scheme goes burst there will not be major financial impact on single investor because loss will be equally divided among all the investors of debt mutual fund.

Default on Company Fixed Deposits

All said and done, What if there is a default on Company Fixed Deposits. Unfortunately there is no proper complaint redressal mechanism. Some states have local laws to deal with such cases like Maharashtra has Maharashtra Protection of Interest of Depositors Act. In case of default by NBFC (Non Banking Financial Companies), you can complaint to RBI & CLB (Company Law Board). In case of default by manufacturing company like JP Associates, you can complain of Ministry of Corporate Affairs. For listed companies, you can also forward the copy of complaint to SEBI. All the companies in india are registered with Registrar of companies therefore you can also complain to Registrar of Companies. Besides this you can also file a case in civil or consumer court against the company.

Hope you liked the post. It is always advisable to think twice before investing because it is your hard earned money. Any investment decision should not be based on successful marketing campaign. The brokerage houses get good commission on Company Fixed Deposits therefore they will always suggest to go ahead & deposit. Though not all companies default on payment but Are you ready to take this risk?

Copyright © Nitin Bhatia. All Rights Reserved.

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