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 mobilize are governed by the Companies Act under Section 58A. These deposits are unsecured, i.e., if the company defaults, the investor cannot sell the documents to recover his capital, thus making them a risky investment option.
Benefits of investing in Company Fixed Deposits :
- High Interest.
- Short-term Deposits.
- Lock-in period is only 6 Months.
- No Income Tax is deducted at source if the interest income is up to Rs 5,000 in one financial year.
- Investment can be spread in more than one company, so that interest from one company does not exceed Rs. 5,000.
Companies where you should not invest
How to choose a company for investing in FDs
Like most investment option, Company Fixed Deposits are a mixed bag. Company FDs can be an interesting investment option if you know how to select the right FD, and how to avoid the no-so-good ones.
Here are some of the points that investors should keep in mind.
Spread your Risk
The deposits should be spread over a large number of companies engaged in different industries. This way, you’ll be able to diversify your risk among various industries/companies. Try not to put more than 10% of your total investments in one particular company.
Choose the right period of Deposit
Ideally, the investment should be for 1 to 3 years depending upon the rate of interest.
Periodic Review
The performance of the companies should be reviewed at maturity. This will help you decide whether to renew or reshuffle the deposit. It is also wise to keep a track of these companies by checking their share prices, annual reports and other details reported in newspapers.