You can make a deposit with a Company in a similar way to a bank fixed deposit. The Company pays a slightly higher rate of interest on deposits made with them, than a bank fixed deposit for a fixed time period.
However, these deposits are unsecured.
Therefore, if the company defaults, the investor cannot sell the company to recover his/her capital.
On the other hand, corporate FD’s apart from giving a superior interest rate than banks, also provide investors with a short-term deposit option with shorter lock in period as well as the benefit of having no income tax deducted at source if the interest income is up to certain amount in one financial year.
HOW TO INVEST MONEY INTO A COMPANY?
Fixed deposits investment has been highly preferred by a large section of people due to the minimised risk, assured returns on deposits irrespective of the prevailing market situation, pre-determined tenure of investment.
When most people think about fixed deposits (FDs), the first thing that comes to the mind is approaching a bank to open one.
However, that is not the only place where you can open fixed deposits. Many finance houses and Non-Banking Financial Companies (NBFCs) also offer investors the facility to open fixed deposits that offer interest rates that can be higher than what most banks offer.
Corporate Fixed Deposits or Company Fixed Deposits are saving cum investment tools offered by Non-Banking Financial Companies or NBFCs.
These corporate or company fixed deposit schemes are backed by higher FD (as compared to bank FD rates) interest rates.
2.0 WHAT IS A COMPANY FIXED DEPOSIT?
Company deposits are unsecured investments and carry relatively higher risk than bank FDs. Such CFDs are offered by manufacturing companies and nonbanking finance companies (NBFCs) for varying tenures and with different frequency of interest payments.
A company FD or company term deposit is nothing but a type of FD that is issued by companies such as finance companies, housing finance firms or other types of NBFCs.
Company fixed deposits are a great way to raise funds from the general public for many firms / companies. These time deposits are usually rated for their credibility by a number of rating agencies.
3.0 BENEFITS OF COMPANY FIXED DEPOSITS
There are few benefits of company fixed deposit that makes it preferable over other counterparts.Higher Interest Rates: The best thing about a company FD is the interest rate. These deposits function as the regular fixed deposits but feature higher interest rates. The rates paid are comparatively much higher than what is paid for an average bank FD.
3.1 Application Process
The application process and eligibility clauses are much simpler than those of regular bank fixed deposit scheme.
3.2 Periodic Interest Payment Options
They may be flexible in some cases. They offer non-cumulative and cumulative interest pay-outs. This means that you get to choose your tenor or maturity terms. Moreover, there are a number of interest pay out options to choose from such as monthly, quarterly, half-yearly, and yearly.
3.3 Credit Ratings
They feature safety ratings by credit agencies. Almost all company FDs are rated by autonomous agencies. You can choose one based on how high the ratings are. This offers customers a chance to go for a well rated FD.
4.0 DISADVANTAGES OF COMPANY FIXED DEPOSITS
CFDs are probably the riskiest of all the fixed income products. This is because the risk of losing the principal is highest here.
Although a CFD that comes with a high rating is recommended, the risk still remains high. Remember, a highly rated CFD reflects relative safety but cannot assure it.
It has been seen in the past that even highly rated CFDs have defaulted and unable to return principal and interest to depositors on time.
Unlike bank FDs that come with a certain guarantee and deposit insurance, company FDs may be risky. This is what is referred to as ‘default risk’. Though this may be the last resort, it is better to be fully aware of the risk factor before making an investment in such an FD scheme. This risk may be mitigated to some extent by going for a well-rated company scheme and doing some background verification.
4.2 No tax benefit
The interest that is earned on these types of FDs will be fully subject to tax. The tax treatment will be the same and there will be no difference.
5.0 HOW TO CHOOSE A COMPANY FIXED DEPOSITS?
If one is interested to invest in a CFD in spite of the risks involved, here are a few tips:
5.1 Check credit rating
All fixed deposits offered by the various companies come with a credit rating issued by institutions. These ratings will help you determine if you should invest with them or not.
5.2 Check interest rates offered
For obvious reasons, this should be the first step you take because if you don’t then some day you might realise that a company you ignored offers you better interest rates than the current one.
5.3 Check the minimum and maximum amounts
Since most of the companies define what the minimum and maximum amount that can be put in an FD is, it is best to check it. In case you wish to start an FD with $ 25,000 but the company you choose allow a minimum of $ 50,000 then you will be in a soup.
Both Bank Fixed Deposits and company fixed deposits are good in their specific ways. Much of the final decision depends on your needs.
Companies offer higher interest rates than the average bank FD rates. This leads to better yield.
For instance, if you want more security, then bank deposits are good. But if your priority lies in receiving higher interest, then company deposits are ideal.
If you have short-term investment goals but don’t want to deviate towards riskier options like shares or mutual funds, go for company FDs.