Benefits of investing in company fixed deposit
Many companies offer liquidity option such as premature withdrawal and loan against these deposits. Company fixed deposit offer cumulative and non-cumulative interest payout options
Fixed deposit offered by the banks is the most preferred investment avenue. They offer safety of the principal amount and assured return in form of fixed interest rate. However, with the declining interest rate scenario in India, the interest rate on the bank fixed deposit currently remains at 4.9% for the term of the one year compared to 9.25% for similar term around 10 years ago. Lower rate of interest is not sustainable given the gradual increase in inflation and adjustment post taxes. Hence, investors who have higher risk appetite can consider alternative avenues which offers fixed returns. One of them is company fixed deposit. Company fixed deposit typically offer higher rate of interest compared to conventional bank fixed deposits. The interest rate will be mostly above 6% and in some cases even more than 8% with the deposit term ranging from 1 year to 5 years. There are higher rates for the senior citizen as well. However, don’t get lure just by higher interest rate, check the underlying risk factors before taking the investment decision. Check the company website to get idea about rates and all the other terms and conditions. The article details about the benefit and risk factors of investing in company fixed deposit.
Key features of the company fixed deposit
Company fixed deposit are the offerings of the large non-banking finance companies (NBFCs) and housing finance companies (HFCs) namely, LIC housing finance, Bajaj Finance, HDFC, ICICI Home Finance, Muthoot Capital and many more. Company fixed deposit offer higher yields and investors to choose different tenure. Many companies offer liquidity option such as premature withdrawal and loan against these deposits. Company fixed deposit offer cumulative and non-cumulative interest payout options. In case of the cumulative payout, the interest will be payable at the time of maturity of deposit along with the principal amount and interest is compounded annually. In case of the non-cumulative payout, the interest will be paid monthly, quarterly, half-yearly, or yearly basis as per your requirement.
These deposits are rated by the leading rating agencies such as CRISIL, ICRA and CARE. Deposits with AAA rating (higher rating) is safer compared to rating of AA, A, or BBB rating. Hence, before investing check the rating profile. Further, these companies have to adhere to stringent regulations and guidelines laid down by the RBI and Ministry of Corporate Affairs (MCA). The tax structure of the company fixed deposit is similar to bank fixed deposit wherein the interest rate is added to the taxable income of the investor. If the interest income exceeds Rs 5,000 a year, tax at source is deducted (TDS) by the company. There is no capital gains tax.
While the relatively higher returns make company fixed deposit as an attractive option. Note higher returns comes with higher risk. These deposits are subjected to several type of risk:
- Default risk – While investing in company fixed deposit it is crucial to choose companies which are financially strong and have the highest credit rating. This is because if the financial position deteriorates, it will be difficult for the company to repay the interest and principal amount. There are times company’s financial position might deteriorate over a period of time and it might default on the payout.
- Inflation risk – Even if the company fixed deposit fetch higher returns, inflation can wipe off the higher returns benefit and real returns will be very low. Like for instance, assuming interest rate is 6% and inflation is 4% then real returns is just 4%. Hence, despite higher yield company fixed deposit are not able to beat the inflation.
- Liquidity risk – Unlike market linked avenues, company fixed deposit the amount is locked for the fixed tenure ranging from few months to years depending on the tenure you choose. Hence, to liquidate investors need to incur the penalty in form of accepting lesser interest amount. However, there are several NBFCs and HFCs which offer pre-mature withdrawal facility.
- Interest rate and reinvestment risk - Company fixed deposit is sensitive to interest rate scenario as the yield is fixed until maturity. This creates interest rate risk as if the interest rate increases in the economy, then investor will not be able to get benefit of higher yield as the FD is locked at the relatively lower rates for the longer term. On the contrary, in case of the falling interest rate scenario, FDs which are due to mature will get offered a lower rate at the time of maturity.
Apart from the above risk factors, investors need to note that the bank fixed deposit are insured up to minimum of Rs 5 lakh by the Deposit Insurance and Credit Guarantee Corporation (DICGC). This is not case with the company fixed deposit. In addition, investors falling in the higher tax bracket, the post-tax returns will be less attractive.
Higher returns than the conventional bank deposit enhances the appeal of the company fixed deposit. But is crucial to be well versed with all the risk factors, evaluate the credit worthiness and invest only in those company deposits which are AAA rated and financially stable. Also decide on the investment amount and tenure in line with your own risk appetite and investment horizon as unlike bank fixed deposit these deposits are riskier.