Fixed deposit investors are always looking for the best bank offering the highest rate of interest. One of the best alternatives of Bank FD is Company Fixed Deposit or Corporate Fixed Deposits. Company Fixed Deposit provides a high rate of interest.
E.g. Bank FDs such as SBI fixed deposits with 1-3 year maturity is offered at an interest of 8.5 percent. At the same time, the company FD is offered at a considerably higher interest rate, which is usually in the range of 10.25-11 percent.
Also Read – How to close SBI Fixed Deposit Online?
The rate of interest provided by the company FD is higher compared to Bank FD, but you will not get the same level of safety in the company FD. If you are planning to invest in the company FDs, you should be aware of the benefits and drawbacks of investing in company fixed deposits. Investing in company fixed deposit without due diligence can be risky.
What is a company fixed deposit?
A Company Fixed deposit is deposit made in a company for a fixed period at a specified interest rate. Company deposits are like unsecured loans taken by companies without any collateral. Special permission from RBI is required to raise money from the general public via company fixed deposit.
Why to invest money in the company fixed deposits?
One of the prime reasons for investing money in company fixed deposit is a higher rate of interest. You can earn 1-3 % higher return compared to bank fixed deposit. If you are moderate risk investors and falling in the zero- or lower-income tax bracket you can prefer to invest in the company fixed deposit. These types of fixed deposits also offer monthly or quarterly interest payments. So, if you want to supplement your income you can make an investment in the company FD. You should consider the following factors before investing in Company FDs.
Track record and reputation of the company – You should look at the track record and reputation of the company before investing money. Try to find out the company’s repayment record, promoters’ history, its financial aspects such as losses, debts, etc.
Credit Rating – Every company fixed deposit has to go through a rating process where agencies such as ICRA, Crisil, CARE provides ratings on the company FDs. The credit rating is a measure of the company’s ability to pay the interest as well as principal to its investors. A high rating means no or very low probability of default. You should go for a higher credit rating.
Interest Rates – The interest rate is another factor for consideration. The rate of interest offered by company fixed deposit is higher than regular banks. But if a company is offering exceptionally high rates suppose 15% pa, then it is advisable to be a little cautious.
Term – You should also look at the term of the company FD. The term of company FD is generally low compared to normal FD. Some FDs are available with a lock-in period.
Special Benefits – You also need to see if any special benefit is extended by the company. Many company FD scheme offers special interest rate to a senior citizen, etc. Make sure to go through details before availing such benefits.
Lock-in Period & Premature withdrawal – Most of company FD scheme have a lock-in period of 3 to 6 months. You also need to pay a penalty in case money is withdrawn prematurely. A premature withdrawal also affects interest rates.
Income Tax Rules – Tax rules applicable to company FD is similar to that of a bank FD scheme. The interest income is added to the individual income and taxed as per individual tax slab rate. The interest amount needs to be calculated while filing income tax returns.
Insurance & Security – Bank FDs are covered with insurance benefits. Whereas company fixed deposit schemes are not covered with any insurance coverage. So, it is advisable to know about risk associated with such FDs.
Type of Schemes – There are two types of company FD scheme. Cumulative and Non-Cumulative schemes. In case of Cumulative Deposit scheme, the interest is paid along with the principal amount on the maturity date. Whereas, under the non-cumulative scheme, the interest amount is paid periodically.
A company fixed deposit scheme provides a higher interest rate. It is suitable for investors with medium risk appetite. Company FDs are little unsecured and not governed by Reserve Bank of India. The chance of default in company FD is higher. So, it is advisable to go through features and details before investing in the company FD.