Fixed Deposit Introduction
There are several options available when it comes to where to make a fixed deposit. One of the most common areas where a fixed deposit is offered is the banks. All types of banks, be they public sector or private sector or even co-operative banks, offer fixed deposits for their customers. This makes fixed deposits one of the most accessible options for investors because of the fact that most people have a bank account at some place or the other.
The second option for investing in a fixed deposit is with a financial institution. There are several institutions that offer a deposit option. This can include housing finance institutions or even other lending institutions that offer deposits as a means of raising funds for their activities. It can also include various non-banking finance companies that are trying to raise funds through the route of deposits so that they can tap a larger investor base for their fund requirements.
There is one more area where fixed deposits are offered; these are the companies that seek to raise funds through this route. Various companies from the manufacturing to the service sector need funds for financing their various activities and they raise money through the route of company fixed deposits. The features of all these deposits are the same; the only difference is being the entity that is issuing the deposit, so there will be a difference in the risk element for the investor in these deposits.
Fixed Deposits in companies that earn a fixed rate of return over a period of time are called Company Fixed Deposits. Financial institutions and Non-Banking Finance Companies (NBFC’s) also accept such deposits. Deposits thus mobilised are governed by the Companies Act under Section 58A. These deposits are unsecured, i.e., if the company defaults, the investor cannot sell the documents to recover his capital, thus making them a risky investment option.Benefits of investing in Company Fixed Deposits
Where not to invest
- High Interest.
- No deduction of Income Tax at source up to Rs 5,000 p.a.
- Short-term deposits.
- Lock-in period is only 6 months.
- No Income Tax is deducted at source if the interest income is up to Rs 5,000 in one financial year .Investment can be spread in more than one company, so that interest from one company does not exceed Rs. 5,000.
- Company Fixed Deposits are non transferable that means there is no fear of FD receipt being stolen. In case it falls into wrong hands ,it cannot be misused. The FD holder in such a case should write to the company which shall issue duplicate deposit receipt upon execution of an indemnity and cancel the previous one.
- Further, advantage of investing in company fixed deposits is that one can analyse the company before investing in it because companies accepting deposits are old-established reputed companies with proven track records.
- Recently, nomination facility has been introduced in company fixed deposits.
How to choose a company for investing in FDs
- Companies that pay a rate of interest higher than 14%.
- Companies that are not paying regular dividends to their shareholders.
- New companies belonging to first generation of promoters, which are yet to prove their credit worthiness.
- It is best to avoid private limited companies, and partnership firms and other un-incorporated bodies. Such companies are under no obligation to publish their balance sheets working results and it is, therefore, very difficult to judge their performance.
- Companies whose balance sheets show accumulated losses.
- Companies with a poor liquidity position and below investment grade rating.
There are many companies operating in the Company Deposit market. Investors, however, have to be careful while selecting a company for investing their hard earned money. Following is a checklist for selecting good companies.
Credit rating/reputation and size of industrial group
The first thing to check out is the rating of the deposit scheme. Investors should avoid those companies that have below ‘A’ rating. In case of manufacturing companies, it is not mandatory to get a rating.
In this case, investors should look at the background of promoters and financial track record. In manufacturing companies, reputation and size of industrial group to which the company belongs are the key criteria for safety and reliability.
Don’t put all your eggs in one basket
The deposits should be spread over a large number of companies engaged in different industries. This way, you'll be able to diversify your risk among various industries/companies. Try not to put more than 10% of your total investments in one particular company.
Period of deposit
Ideally, the investment should be for 1 to 3 years depending upon the rate of interest.
The performance of the companies should be reviewed at maturity. This will help you decide whether to renew or reshuffle the deposit. A watch should also be kept over these companies by checking their share prices, annual reports and other details reported in newspapers.
Limits on raising Company Deposits
Manufacturing companies are permitted to mobilise deposits as indicated below:
(a) Up to 25% of their net worth from their public; and
(b) Up to 10% of their net worth from the share-holders and others.
(Net worth means paid-up capital plus free reserves, minus miscellaneous expenditure, if any