company fixed deposit : things to consider before investing

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Company Fixed Deposit --things to consider before Investing--

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Company Fixed Deposit--things to consider before Investing--

What is Company Fixed Deposit?

Deposits by investors in Companies that earn a fixed rate of return over a stipulated period of time are known as Company Fixed Deposits. Manufacturing Companies, Financial Institutions and Non-Banking Finance Companies (NBFCs) accept such deposits. Companies Act under Section 58A governs such transactions. Unlike bank fixed deposits, these deposits come with a risk factor, i.e., if the company defaults, the investor cannot sell the documents to redeem his capital investment.

Benefits of company fixed deposits are: 

• It offers a higher rate of interest.• It provides short-term deposit option.• 6 months is the minimum lock-in period.• Income Tax is not deducted at source if the

interest on income is up to Rs.5,000-/ during the financial year

Rise in Investment : Company Fixed Deposit

Currently there is a rise in investment in company fixed deposit since it has been observed that RBI is going to cut down interest rates, which would alternately affect bank interest rates and company fixed deposit rates unfavourably, in the near future. Company fixed deposits are an attractive investment choice since it offers more returns than bank fixed deposit schemes. While fixed deposits in SBI offers an interest of 8.75% for a term of 1 to 3 years, financial institutions pay out an interest of 9.25% and manufacturing firms offer an attractive are paying much more. However, there are some risk factors involved in this option.

Things to consider before Investing on Company Fixed Deposit

1. Credit Rating 2. Company Quality 3. Liquidity 4. Interest Payments

Credit Rating 

One of the main factors indicating and ensuring authenticity of an organization providing fixed deposit schemes, is the rating given to them by credit rating agencies such as Crisil, India Ratings, Fitch, CARE and so on, on a rating scale indicating risk and safety. Ratings such as AAA by Care indicate high level of safety and has very low credit risk and FA indicates negative rating. Crisil ratings such as FAAA , FAA and FA indicate highest to moderate level of safety respectively and FB and FC rating shows a high level of risk. Investors should watch out for such credit ratings and invest wisely.

Company Quality

 Another important factor that should be considered before investing in a company fixed deposit is to verify the background of the company and its payout records including reports on their losses, debts, repayment patterns, etc. One of the tricks employed by companies with low credit ratings , is to offer higher interest rates to attract investors.

Liquidity 

The lock in period, i.e, the period during which an investor can not withdraw or sell an investment, as stipulated by the company, determines the liquidity of the product. Product liquidity indicates the easy availability of deposited capital. Most schemes have a minimum lock-in period of 3-6 months. If the investor wants to withdraw funds after three months but before six months, the company is paid an interest of up to 4 per cent per annum. If the investor withdraws funds after six months and before the fixed term is over, the interest payable will be 1% lower than the interest offered initially.

Interest Payments

 Different fixed deposit schemes pay interest at different time frequency - monthly, quarterly, annually, half-yearly and/or cumulatively. As per individual need for income through such interest payments, the investors should choose company fixed deposit schemes. Benefits received from fixed deposits with cumulative interest rates are higher than the rest.

Visit http://www.bankbazaar.com/fixed-deposit.html for more detail.