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.
Corporate fixed deposits are riskier than bank fixed deposits and do not enjoy the safety, bank deposits provide. Your money in a bank FD is guaranteed by the Deposit Insurance and Credit Guarantee Corporation up to INR 1 Lakh in the bank.
The deposits you make in a corporate fixed deposit are unsecure in nature. The Company could default on the interest payments to you, or worse not return your principal amount. You need to be assured that your money is in safe hands
You get a higher rate of interest than a fixed deposit. In times of inflation, you get higher returns, than other fixed income securities.
An investment in corporate fixed deposits of high rating, is relatively safe. Higher the rating, more is its safety.
Senior citizens get a higher rate of interest than a younger person. NRI's can also invest in corporate fixed deposits.
If you invest in corporate fixed deposits of reputed banks, you have a higher degree of safety than private Companies.
If you are a resident of India or an NRI, you can invest in a corporate fixed deposit. Senior citizens, housewives, charitable and religious institutions invest in a corporate fixed deposit.
You can make a premature withdrawal from a bank fixed deposit with a small penalty.
If you withdraw your money from a Company FD within 6 months after you deposit your money, no interest is paid to you.
If you withdraw your money from the Company FD within 6-12 months after the deposit date, you will get a lesser interest say 2-3% lesser than the actual interest rate promised.
You need to check the credit rating of the Corporate fixed deposits before investing your hard earned money with them.
Rating agencies like Crisil, rate corporate fixed deposits. If the corporate fixed deposit has a rating of FAAA, you can be rest assured your money is safe. This is the highest rating and guarantees that the Company will pay interest on the money deposited with them and return the principal amount you deposit with them.
If a Company has a high rating, it is easier for it to borrow money from you, as well as other people and it will offer a lesser rate of interest than say a lower rated corporate fixed deposit.
FAA rating are also highly safe, but not as safe as FAAA rated corporate fixed deposits and offer you a higher rate of interest to make up for the additional risk.
FA rated Company deposits are adequately safe. If the corporate fixed deposit has a rating of FB or FC, you need to be very careful, even if the Company pays you a high rate of interest on the deposits you make with them.
You can approach the Company where you want to invest in a corporate fixed deposit. Many a time Companies place advertisements of their corporate fixed deposits in leading newspapers.
The tenure of a corporate fixed deposit is generally 1-5 years.
You can withdraw prematurely from your corporate fixed deposit under certain conditions.
Corporate fixed deposits are similar to banking FD's, except that the money invested is with a company and not a bank. Deposits under corporate FD's are governed by the Companies Act under Section 58A.
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 only a six month lock in period as well as the benefit of having no income tax deducted at source if the interest income is up to Rs 5,000 in one financial year.
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Ignore the unrated Company Deposit Schemes. Ignore deposit schemes of little known manufacturing companies. For NBFCs, RBI has made it mandatory to have an 'A' rating to be eligible to accept public deposits. One should go further and look at only AA+ or AAA schemes.
Within a given rating grade, choose the company with a better reputation.
Once you decide on a company, choose the schemes that have given a better return. Unless you need income regularly, you should prefer cumulative schemes to regular income options since the interest earned automatically gets reinvested at the same coupon rate, resulting in better yields. It also gives you a lump-sum amount at one go.
It is better to make shorter deposit of around 1 year to 3 years. This way, you can not only keep a watch on the company's rating and servicing, but also have your money back in case of an emergency.
Check on the servicing standards of the company. You should not invest in companies that care little about investor services, like promptly sending interest warrants or the principal cheque.
Involve your Financial Planner / Investment Advisor for advice in all your transactions. Do not bypass and invest directly.
Yes, you will get FD receipt. But, you will not be issued a receipt for FD opened through Internet Banking.
Yes, FD can be closed before the original term of the FD. In the event of the Fixed Deposit being closed before completing the original term of the deposit, interest will be paid at the rate applicable on the date of deposit, for the period for which the deposit has remained with the bank. In case of premature withdrawal the deposit may be subject to penal rate of interest as prescribed by the company on the date of deposit.
After maturity of your FD, you can walk into company and claim your deposit by furnishing your Fixed Deposit receipt/Memorandum of Deposit.
Interest is paid on monthly/quarterly/half yearly/yearly basis or on maturity, and is sent either through cheque or through Electronic Clearing System basis.
TDS is deducted if the interest on fixed deposit exceeds Rs.5000/- in a financial year.
Check On Credit Ratings : A very important indicator. It highlights the underlying risk of the company. AAA rating denotes the highest safety. It indicates the financial health of the company and the ability to service its financial obligations. In simple words, AAA rating indicates that you can trust a particularly rated company with your money and expect it to pay the interest amount due to you. CRISIL and ICRA are India's leading credit rating and research institutes. They do a detailed research of the company and then rate them.
Check on promoter Credibility : Promoters play a substantial role in making or breaking a company. So always do a background check on them. Promoters with dubious or shaky records should be strictly avoided. Doing a background check on promoters is easier said than done so the safer route is to invest in fixed deposits of a blue-chip company.
Get lured by High interest rates : Any company offering a very high rate of interest should be a cause for concern. Companies generally offer high rate of interest to make up for the perceived risk attached with their offerings. So again don't get carried away with high rate of interest as they always come with high risk. The major risk in case of a company FD is that if the company is unable to repay your money, you end up losing it. But in case of banks, the rules are stricter and your money is safe as the bank FDs are insured up to Rs. 1 lakh.
Don't forget to check on past performance : Although past performances are generally not considered a very good indicator of the future of a company, one should not completely avoid it. Any investor must check the past payment history of the company. He should also check the investor service standards of the company.
Don't hesitate with regulator assistance : There are regulators to keep a check on any frauds or mishandling of public money by companies or mutual funds or exchanges. So in case your company defaults; check who the regulator is and lodge a complaint with them. For listed companies you can file your complaint with the Securities and Exchange Board of India. For manufacturing companies it is Department of Company Affairs. For banks and non-banking financial companies it is the Reserve Bank of India.
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