Company fixed deposits provide an alternate investment option to investors who look for fixed returns. In comparison to bank fixed deposits, company fixed deposits offer higher returns across different tenures. “Company fixed deposits are offered by Housing and Non-Banking financial companies (NBFCs) under the Companies Act, 2013 guidelines. They offer higher interest rates in comparison to bank fixed deposits,” says Mohit Mittal, VP & Product Head Investments, Bajaj Capital.
However, the risk compared to bank deposits is higher in them. “Company fixed deposits are unsecured in nature and don’t have any Deposit Insurance in place as of now unlike Bank FDs where up to Rs 5 lakh is secured. While considering the overall health of the NBFC and HFC, one can consider the Risk-Reward and invest in a diversified manner to ensure minimum risk and decent returns,” says Mittal.
Generally, the tenure range from 6 months to 60 months and there are various interest payment options to choose from cumulative deposits (where interest is payable at the time of maturity) or con-cumulative CFDs (where interest may be payable at monthly, quarterly, half-yearly or annual basis). It’s better to avoid locking in funds for a longer tenure in them. Remember, the higher the return, the higher is the risk involved.
It is better to invest in company fixed deposits that carry AAA ratings denoting high safety for capital invested and interest earnings. Still, the ratings may change over time and hence relying entirely on them may not be the right approach. “Since most of the NBFC and HFCs offering Fixed Deposits carry high Rating such as AAA, stable financials over the past few decades and strong Management to look after, hence can be considered it as a safe option,” adds Mittal.
According to Mittal, few important points to consider before investing in company FD are:
- Don’t put all the eggs in a single basket: Investor should diversify the investment in multiple companies. Ideally not more than 10-15% of the overall portfolio should be invested in a single company.
- Investors must carefully read the application form before investing.
- Check the Rating and Financials of the company before investing.
- Do a background check of the company before investing money into it.
The minimum investment amount in company fixed deposits may vary across tenures and companies. Some deposits may offer a higher rate of interest for a specific tenure but the minimum investment amount may be higher than the regular deposits.
There are some companies that offer online deposits and even offer an additional rate of interest. Some of the deposits may carry additional incentives in case of renewal of deposits with them.
It is suggested to stick to only reputed companies which have strong financials. Also, stagger your investment across different tenures while diversifying across companies. Instead of investing for a similar tenure, spread across 1-2-3 year period as it helps in managing re-investment risk as well. Finally, do not invest in them solely for higher returns as the corresponding risk will also be high and the possibility of losing the capital invested will be there.