Skip to main content

Investing in company FDs

Choose an instrument that carries AA or higher rating

THE interest rates on bank fixed deposits (FDs) are falling. While most top banks are offering an interest rate between 7 and 8.75 per cent for deposits below Rs 15 lakh with one-year maturity, company deposits of various housing finance companies (HFCs) and non-banking finance companies (NBFCs) on the other hand are offering more than 9 to 10 per cent.


For maturity period of two to five years, the company FDs are offering yields of 10.23-13.36 per cent.
 
Although the return may be high, company FDs are more risky and unsecured (not secured against a collateral), compared with bank FDs. In case a company goes kaput, you will not get your money back. Also, remember that fixed deposits of all banks (including foreign banks, regional rural banks and co-operative banks) are insured up to Rs 1 lakh by the Deposit Insurance and Credit Guarantee Corporation (DICGC) against default of banks due to liquidation, cancellation of banking licence or merger. There is no such guarantee on company FDs.
 
Here are a few factors you should consider before investing in a company FD:
 

Check the financials of the company: Since, economic slowdown is affecting several companies, it is advisable to invest in reputed and strong firms. Check the credentials and financials of the company in which you are investing. A strong company that regularly pays out dividends and has no losses, would be safer than a company that offers very high interest rate but is posting regular losses. The key factors to look into would be profits, growth, capital adequacy, non-performing assets and a low debt to equity ratio.


Check the ratings: The rating of such instruments can help you make an informed choice. Says Surya Bhatia, a certified financial planner, Choose a deposit that carries a AA or a higher rating. Those company FDs that do not carry a rating, are riskier and have a high chance of defaulting on interest and principal repayment. But the flip side is that the returns on higher-rated FDs are considerably lower than those for lower-rated FDs.


Invest for a shorter horizon: It is advisable to minimise your risk by investing in multiple corporate deposits. Also, choose a shorter tenure of say one or two years, to reduce your risk further.


Liquidity problem: Since most company FDs do not allow premature withdrawal of your principal, you will not be able to break the FD before maturity. Also, some companies may deduct the brokerage paid to distributors from the premature withdrawal amount.


Tax deducted at source (TDS): TDS will be deducted if the interest on a company FD exceeds Rs 5,000 in a financial year. Therefore, spread your investments in multiple FDs if your interest is going to be more than Rs 5,000 from one FD. Also, calculate the post-tax return before investing.
 
A pursuit of higher returns from company FDs comes with risks that are not commensurate with the extra post-tax return you will get from it, compared with the slightly-lower posttax returns from bank FDs and debt schemes of mutual funds. So, be a bit wary.
 

Happy Investing!!

We can help. Call 0 94 8300 8300 (India)

Leave your comment with mail ID and we will answer them

OR

You can write back to us at PrajnaCapital [at] Gmail [dot] Com

---------------------------------------------

Invest in Tax Saving Mutual Funds ( ELSS Mutual Funds ) to upto Rs 1 lakh and Save tax under Section 80C.

Invest Tax Saving Mutual Funds Online

Tax Saving Mutual Funds Online

These links can be used to Purchase Mutual Funds Online that are regular also (Investment, non-tax saving)

Download Tax Saving Mutual Fund Application Forms from all AMCs

Download Tax Saving Mutual Fund Applications

These Application Forms can be used for buying regular mutual funds also

Some of the best Tax Saving Mutual Funds available ( ELSS Mutual Funds )

  1. ICICI Prudential Tax Plan Invest Online
  2. HDFC TaxSaver Invest Online
  3. DSP BlackRock Tax Saver Fund Invest Online
  4. Reliance Tax Saver (ELSS) Fund Invest Online
  5. Birla Sun Life Tax Relief '96 Invest Online
  6. IDFC Tax Advantage (ELSS) Fund Invest Online
  7. SBI Magnum Tax Gain Scheme 1993 Invest Online
  8. Sundaram Tax Saver Invest Online
  9. Edelweiss ELSS Invest Online

Popular posts from this blog

Surrender ULPPs

  ICICI Pru LifeTime and ICICI Pru Lifestage are Unit Linked Pension Plans. Such insurance linked retirement plans are neither good investments nor do they offer sufficient insurance cover. As you can see, these have turned out to be bad deals. In the Lifetime plan, the fund value is not even equal to the total premiums that you have paid and in the Lifestage plan your return is just about 6% which is quite low. The mortality charges are as per your age which is why they have increased. Moreover, once these plans matures, you will have to compulsorily opt for annuity (regular income) and the annuity rates are generally modest. Assuming these plans mature in the next one year, it will be wise to surrender the plan now and curb your future commitments.   Before you choose to buy a term plan, you have to consider a few points. You need to insure yourself, only during the time you are working and your family is financially dependent on you. At the age of 59, not all insurance companies w...
Read more

Sundaram Mutual Fund new plan Sundaram Fixed Term Plan CJ

Sundaram Mutual Fund has announced the launch of a new fund named as Sundaram Fixed Term Plan CJ. The new issue will be closed for subscription on January 30. --------------------------------------------- Invest in Tax Saving Mutual Funds ( ELSS Mutual Funds ) to upto Rs 1 lakh and Save tax under Section 80C.   Invest Tax Saving Mutual Funds Online Tax Saving Mutual Funds Online These links can be used to Purchase Mutual Funds Online that are regular also (Investment, non-tax saving)   Download Tax Saving Mutual Fund Application Forms from all AMCs Download Tax Saving Mutual Fund Applications   These Application Forms can be used for buying regular mutual funds also   Some of the best Tax Saving Mutual Funds available are: 1. HDFC TaxSaver 2. ICICI Prudential Tax Plan 3. DSP BlackRock Tax Saver Fund 4. Birla Sun Life Tax Relief '96 5. Reliance Tax Saver (ELSS) Fund 6. IDFC Tax Advantage (ELSS) Fund 7. SBI Magnum Tax Gain Scheme 1993 8. Sundaram Tax Saver   -...
Read more

Group Health Insurance

Buy Group Health Insurance Online   For Human Resources, the biggest challenge today is to decide whether medical benefits should be offered to employees or not, what type of plans should be offered, what will be the cost and how will the cost be split between employees and employer. Well, most of these are subjective and would depend on a lot of factors including company size, average employee salary, etc. However, this article will give you a fair idea on how you should go about deciding these factors: 1. Why offer group health insurance benefit to employees : Studies have proved that retention rates among employers offering GHI are much higher than the ones who are not offering. Moreover, the cost of providing this benefit as a percentage of salary is very low as compared to the perceived value. As an example, say if average salary of an employee in your organization is 4 LPA. If you decide to offer a health insurance benefit to him for a Sum insured of ...
Read more

Commercial Paper (CP)

Invest Mutual Funds Online Download Mutual Fund Application Forms Commercial Paper (CP): These are issued by corporate entities in denominations of Rs.2.5mn and usually have a maturity of 90 days. CPs can also be issued for maturity periods of 180 and one year but the most active market is for 90 day CPs.   Two key regulations govern the issuance of CPs-firstly, CPs have to be compulsorily rated by a recognized credit rating agency and only those companies can issue CPs which have a short term rating of at least P1. Secondly, funds raised through CPs do not represent fresh borrowings for the corporate issuer but merely substitute a part of the banking limits available to it. Hence, a company issues CPs almost always to save on interest costs ie it will issue CPs only when the environment is such that CP issuance will be at rates lower than the rate at which it borrows money from its banking consortium. ----------------------...
Read more

Why credit history is critical?

Will you need a loan to buy a car or a house? Do you know why some people get their loans sanctioned quickly without any hassle, whereas others find that their approval is delayed or their application is rejected? If you want a loan, you will need to work to build a solid credit history because this can have a bearing on the ease with which you get loans. Read on to learn more about what is a credit history and how to build a good credit score. What is a credit history? Your credit history is a way of tracking your credit behaviour and habits — basically it shows how disciplined and regular you are when it comes to repaying your dues on loans that you have taken. It will show a complete record of your past borrowing and repayment record including details about any late payments or if you have defaulted on a loan. This track record is readily accessible to lenders and is used by them to when reviewing your loan application. Borrowers who have historically had a bad record of managing...
Read more
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now