With Interest rates in the banks, both private and public sector, remaining unchanged, the retail investor must look at other options for higher returns on their investment. In this context, corporate or company Fixed Deposits (FDs) have started looking attractive again.
If we look at the various company Fixed Deposits (FDs) in the market today, many of them offer 2 to 3 percentage basis points more than that of bank fixed deposits. Those with risk appetite, and willing to park their money for few years, can take advantage of the attractive rates of interest offered by companies and earn upto 12.5 percent interest.
Difference between Bank FDs and company FDs
Unlike deposits in banks, which are guaranteed by Reserve Bank of India, company deposits have only limited liability and hence offer higher rates of interest to their depositors.
The tenure of company deposits can be from six months to up to 10 years. Some companies also offer higher rate of interest to senior citizens. But company deposits are governed by Companies (Acceptance of Deposits), Rules, 1975, and the onus is on the investor to ascertain if the company can pay back his deposits at the end of the tenure or not.
A significant difference in returns
A quick study of the current market shows while bank FDs may offer up to 9-9.99 percent for a three year fixed deposits, companies like HDFC, JP Infra, Shriram group and Mahindra Finance are offering returns in the range of 10.0 to 12.5 percent basis per year.
The country’s largest housing finance company HDFC, which boasts of triple ‘A’ ratings from CRISIL and ICRA, offers interest rates in the range of 9.5-9.55% ín the cumulative option.
Such mouthwatering rates of returns and the stability of the large business houses offering them is what draws small investors to these deposits schemes.
However, the small retail investors need to be aware of few things before they put in their hard earned money into the company deposits.
Beware of high interest rates: The companies that promise too high a rate of return may be too good to be true. There have been several small companies failing to return the money deposited to them by the investors.
Look out for ratings: Even though it is not mandatory for companies to get their deposits rated, some companies like HDFC do and disclose it and are considered slightly safe than companies which do not carry any ratings.
Look at the company’s financial health: Do not just get taken by the high rates of return on offer. Do read the FD document about how the company plans to invest your money, how it has performed in the past and how its balance sheet looks like.
Taxes may deplete rate of returns: Company fixed deposits are taxable and may offer an earnings difference of Rs 1000-1500 over bank FDs if the quantum of investment is Rs 50,000. Post-tax, this differential may come down further. The individual must decide whether it is worthwhile to invest his savings in company FDs for these meagre gains.
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