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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 (NBFCs) 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 company to recover his capital, thus making them a risky investment option.
NBFCs are small organisations, and have modest fixed and manpower costs. Therefore, they can pass on the benefits to the investor in the form of a higher rate of interest.
NBFCs suffer from a credibility crisis. So be absolutely sure to check the credit rating. AAA rating is the safest.According to latest RBI guidelines, NBFCs and comapnies cannot offer more than 14 per cent interest on public deposits.
INVESTMENT OBJECTIVES
Are Company Fixed Deposits Suitable For An Increase In My Investment?
A Company/NBFC Fixed Deposit provides for faster appreciation in the principal amount than bank fixed deposits and post-office schemes. However, the increase in the interest rate is essentially due to the fact that it entails more risk as compared to banks and post-office schemes.
Are Company Fixed Deposits Suitable For Income?
Yes, Company/NBFC Fixed Deposits are suitable for regular income with the option to receive monthly, quarterly, half-yearly, and annual interest income. Moreover, the interest rates offered are higher than banks.
To What Extent Does A Company Deposit Protect Me Against Inflation?
A Company/NBFC Fixed Deposit provides you with limited protection against inflation, with comparatively higher returns than other assured return options.
Can I Borrow Against A Company Fixed Deposit?
Yes, you can borrow against a Company/NBFC Fixed Deposit from banks, but it depends on the credit rating of the company you have invested in. Moreover, some NBFCs also offer a loan facility on the deposits you maintain with them.
RISK CONSIDERATIONS
How Assured Can I Be Of Getting My Full Investment Back?
Company Fixed Deposits are unsecured instruments, i.e., there are no assets backing them up. Therefore, in case the company/NBFC goes under, chances are that you may not get your principal sum back. It depends on the strength of the company and its ability to pay back your deposit at the time of its maturity. While investing in an NBFC, always remember to first check out its credit rating. Also, beware of NBFCs offering ridiculously high rates of interest.
How Assured Is My Income?
Not at all secured. Some NBFCs have known to default on their interest and principal payments. You must check out the liquidity position and its revenue plan before investing in an NBFC.
Are There Any Risks Unique To Company Fixed Deposits?
If the Company/NBFC goes under, there is no assurance of your principal amount. Moreover, there is no guarantee of your receiving the regular-interval income from the company. Inflation and interest rate movements are one of the major factors affecting the decision to invest in a Company/NBFC Fixed Deposit. Also, you must keep the safety considerations and the company/NBFC's credit rating and credibility in mind before investing in one.
Are Company/NBFC Deposits rated for their credit quality?
Yes, Company/NBFC Fixed Deposits are rated by credit rating agencies like CARE, CRISIL and ICRA. A company rated lower by credit rating agency is likely to offer a higher rate of interest and vice-versa. An AAA rating signifies highest safety, and D or FD means the company is in default.
BUYING, SELLING, AND HOLDING
How Do I Buy A Company/NBFC Fixed Deposit?
Company Fixed Deposits forms are available through various broking agencies or directly with the companies. Similar is the case for the NBFCs.
Some of the options available are:
-- Monthly income deposits, where interest is paid every month.
-- Quarterly income deposits, where interest is paid once every quarter.
-- Cumulative deposits, where interest is accumulated and paid along with the principal at the time of maturity.
-- Recurring deposits, similar to the recurring deposits of banks.
What Is The Minimum Investment And The Range Of Investment for A Company/NBFC Fixed Deposit?
Minimum investment in a Company/NBFC Fixed deposit varies from company to company. Normally, the minimum investment is Rs 5,000. For individual investors, there is no upper ceiling. In case of recurring deposits, the minimum amount is normally Rs 100 per month.
What Is The Duration Of The Company/NBFC Fixed Deposit Scheme?
Company/NBFC Fixed Deposits have varying duration; they may vary from a minimum of 6 months to 5 years or even more.
Can A Company FD Be Sold In The Secondary Market?
No, a company/NBFC Fixed Deposit can only be encashed at the Company/ NBFC it was invested in.
What Is The Liquidity Of A Company/NBFC Fixed Deposit?
A company/NBFC Fixed Deposit is liquid to the extent that premature withdrawal is allowed, but it entails a loss of interest.
How Is The Market Value Of A Company/NBFC Fixed Deposit Determined, And How Do I Keep Track Of It?
Company/NBFC Fixed Deposits do not have a market value since they can't be sold or purchased in the secondary market.
What Is The Mode of Holding A Company/NBFC Fixed Deposit?
When a depositor invests in a Company/NBFC Fixed Deposit, a receipt and acknowledgement is issued to him.
TAX IMPLICATIONS
Interest from a Company/NBFC Fixed Deposit is fully taxable, and is not covered under Section 80L of the Income Tax Act. Therefore no deductions are allowed from interest income.
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