Do the due before investing in company FDs

As much as 55% of Indian savings find their way to bank fixed deposits. Over the past one year, fixed deposit interest rates from nationalised banks have gone down from 8-9% to around 6-6.5% now for a period of 1-3 years.

“With fixed deposit rates from banks coming down, investors seeking higher returns from fixed income products are investing in company fixed deposits,” says Aseem Dhru, MD & CEO of HDFC Securities, which has recently started distributing company fixed deposits. Company fixed deposits work for investors seeking assured returns higher than that offered by bank fixed deposits.

Here are some key points you need to keep in mind while investing in company fixed deposits.

Security

Company fixed deposits are unsecured. In case of bank fixed deposits, the Deposit Insurance and Credit Guarantee Corporation of India guarantees repayment of Rs 1 lakh in case of default. There is no such guarantee offered in company deposits and the safety of your deposit depends on the financial position of the company.

This means, as a depositor, you have no lien on any asset of the company, in case it goes into financial difficulties and is wound up. Your turn to get your money back would come only when secured lenders have been paid. So do not invest in unknown companies.

Risk v/s return

Today, investors could expect around 5-8% from income funds, depending upon whether it’s an ultra liquid fund or a long-dated income fund. Schemes like the post office NSC and PPF give you a 8% return, but are locked in for six years and 15 years, respectively.

A corporate like Tata Motors or Mahindra & Mahindra would offer you an interest rate of 8-8.5% while smaller companies like Avon Corporation or Ind Swift offer you an interest of 11-12% for a year. It’s a simple investment philosophy. “You trade return for risk”.

Definitely, the risk involved while investing in smaller companies is higher. Unless you need income regularly, you should prefer cumulative schemes to regular income options since the interest earned automatically gets reinvested at the same coupon rate, resulting in better yields.

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