In addition to bank fixed deposits, companies and non-banking finance companies are allowed to accept money at a fixed rate of interest and for a fixed duration from the depositors. Companies fixed deposits fetch higher rate of interest in comparison to bank fixed deposits. Just like the bank fixed deposits company deposits can also be broken before maturity subject to terms and conditions laid down by the company at the time of accepting the deposit. Company fixed deposits are governed by the Companies Act under section 58A. These deposits are unsecured as they are not covered by any insurance thus making them a risky investment.
Benefits of investing in Companies Fixed Deposits
- High interest rates. Generally interest rates are higher by 2 to 3% compared to bank fixed deposits.
- Short-term deposits.
- Lock-in period is only 6 months.
- No Income Tax is deducted at source if the interest income is up to Rs. 5,000 in one financial year.
- Investment can be spread in more than one company, so that interest from one company does not exceed Rs. 5,000.
Here are some of the points that investors should keep in mind;
Spread your Risk
The deposits should be spread over different companies across different industries. This way, you will not be carrying all your eggs in one basket.
Choose the Right Period of Deposit
Ideally, the investment should be for 1 to 3 years depending upon the rate of interest.
The performance of the companies should be reviewed regularly. This will enable you to decide whether to renew the deposit or not. It is also advisable to periodically check the annual reports and news about the company. Also checking movement of shares prices will certainly give you an idea as to how the company is performing. Some companies which offer Fixed Deposits are very established and are highly reputed, however you can’t ignore the risks involved. If you want to park money for short-term and are comfortable with the risks associated with company fixed deposits, these fixed deposits can be a good products for you.
Stay away from the following:
- Companies which offer very high interest rate (more than 15%).
- Companies which do not pay regular dividends to the shareholder
- Loss making companies
- Companies which are rated below A by the credit rating agencies.
- Private limited Companies and Partnership firms should be strictly avoided.