Corporate fixed deposits offer higher rates than banks. But is it safe and smart to go for them?
Moneylife Digital Team 14 June 2011

There are a few precautions you must take before you are tempted to put your money in corporate fixed deposits

Interest rates offered by banks on their fixed deposits are on the rise. Today banks are offering 8.25% on deposits of more than a year and 9% for deposits of more than two years. These are attractive, but there are even more attractive deposit options from companies looking to raise funds. These include non-banking financial companies (NBFCs) that are raising money from savers at attractive rates.

The rate of interest is determined by the tenure of the deposit as well as some other factors. The deposits are governed by section 58A of the Companies Act. The table below offers some corporate FDs which are currently on offer. The interest rates offered by some companies are substantially higher than that offered by banks.



Is it worth putting money in these FDs to get a couple of percentage points of extra interest? Like bank FDs, they are a good source of monthly, quarterly, half-yearly, or yearly interest income. The tenure is flexible, ranging from six months to seven years. The other benefits are that no tax is deducted at source in case the interest is only up to Rs5,000 in a year. They have a nomination facility and the operational process is simple too-even PAN is not required.
However, higher the interest rate, the more the risk that is associated with it.

Thus, a company offering 15% interest rate would be riskier than that offering 11%. These deposits are not secured, unlike in banks where deposits up to Rs1 lakh are covered by a deposit insurance. Besides, deposits with public sector banks are totally safe. It is inconceivable now that the government will let the depositors of any public sector bank down. But in the case of default by a company, the investor is likely to lose the money. Besides, the investor has no claim over the assets of the company in case the company is to be wound up. That makes corporate FDs risky and, therefore, they attract a higher interest.

In order to protect ones investment from risk, the performance of the company must be reviewed before investing. Also at the time of maturity, if you wish to reinvest your amount, check the company's performance. Keep a regular check on the companies in which you plan to invest by keeping a track of its balance sheet and share prices. This will enable you to decide your investment in corporate fixed deposits. Before investing, ensure that you choose companies that have a good credit rating (A or above).

Here are some guidelines on company fixed deposits that you should avoid.
Companies which offer interest rates that are more than 3% higher than those offered on bank FDs.
Companies that are not paying dividends to the shareholder.
Companies whose balance sheet show losses.
Companies which are below investment grade (A or under) rating.
Unlisted companies, as it is very difficult to judge their performance.
If you wish to get higher returns, you must take a little risk. And if you wish to avoid the risk, you must compromise on the returns. However, when deciding on your option for corporate FDs, it is important to know how to choose the proper fixed deposit and how to ignore the wrong ones. Here are a few tips to ensure higher returns with low risk.

Spread your risk by spreading your investment in fixed deposits over a number of companies in different businesses. Do not put more than 10% of your investment in one company. This has two benefits. First, your risk will be diversified among various industries. Second, the interest from one company may not exceed Rs5,000, and hence there will be no tax deducted at source (TDS).

Choose the right tenure of deposit. Ideally you must invest for a period of one year. Blocking your investment for more than one year could be risky, because the performance of the company cannot be assured over a long period of time.

Make a periodic review of the company from time to time and at the maturity of the deposit. This will help you to decide whether you should renew or reshuffle the deposit. In the case of company fixed deposits, it is necessary to check whether they have been rated by agencies like Crisil, Icra, etc. Also check the number of years that the company has been in business, the profitability of the company, the and the reputation of the promoters.  If you know of people who have invested in company fixed deposits, try to find out if these companies have been prompt  in sending maturity proceeds, interest cheques, and how responsive they are to queries.

Comments
Ramesh B
1 decade ago
True, Co FDRs are unsecured and higher the rate, higher the risk.Many FDs are not rated.Is it not mandatory to get it rated? Anyway, some Co FDR are AAA rated by reputed Agency.One such FD is in the list of article.very reputed group since decades.One pharma Co;offers 12% int.having price of 300+ of 10.But the form doesnot give contact no./email;/website of the co. very strange!FD holders have burnt fingers in many co; like Soundcraft,Morepen lab. etc...
anil lathia
1 decade ago
good article
SHRIDHARA RAO T V
1 decade ago
It Is True Higher Yield higher Risk
narendra ahuja
1 decade ago
Youa re right that one can losse total money . But sometimes one does fall in the prey. It is better to avoid such companies which pay more than 3 percent than banks fixed epsolt rates

n ahuja
9312234825
arun adalja
1 decade ago
no doubt corporate fds are risky but companies like tata and birlas risk is very low and one can trust them at least for 1 year tenure i will be obliged if somebody gives the list of default companies which are not refunding money after maturity?i can give some llyods finance,roofit industries,sun earth ceramics,snowcem and morphane lab.comments are welcome.
vikas gupta
Replied to arun adalja comment 1 decade ago
Unitech Ltd. is delaying the maturity proceeds
Muthu
1 decade ago
I hear from the market about advisors moving investor money from equity into corporate FDs which offer around 3% commission. Infact even within mutual fund schemes, people are being advised to move from equity to FMPs.

When investors question about non performance of equity for the last 3 years (they would have done well through SIP route but not so well for lump sum), it is advisors responsibility to explain about the nature of this investment and explain the virtue of sitting tight.

Even if this means, loosing clients it is fine. If we are genuine, hopefully they would understand the value of our intent and advice and come back to us at some point of time.

I advice what I feel right. At worst, there may be error in my judgment but would not play to clients’ greed and fear. I strongly discouraged lump sum investments in the peak of last bull market, when people wanted to pour in money.

In my opinion, in addition to continuing SIPs, the valuations in the markets now are reasonable to consider lump sum investments, subject to one’s asset allocation.

If the market runs up during next 2 years, what answer these advisors would give for moving away and locking equity money in FMPs or corporate deposits?

I know advisors and wealth management firms who moved clients’ equity money into FDs & FMPs in the later part of 2008, completely missing out the rise in markets of 2009.

One person came to me with Rs.1.8 crore worth mutual fund portfolio. His initial investment in 2006 was Rs.3 crore and the money was managed by a reputed private bank. They have invested his money in the name of more than 6 members of the family, into dozens of schemes, mostly NFOs, totaling more than 90 folios. They have moved most of his money (other than some closed ended equity schemes) into liquid schemes in the end of 2008.

He wanted my help for redemptions and swore that he would never invest again in mutual funds. He was in no mood to listen about the right approach to investing, asset allocation etc. So I helped him in redeeming the funds, ofcourse by charging a fee. I don’t know how many like him would have made a loss of 40% even in bull market, due to inappropriate advice.
CA Karan Batra
1 decade ago
I believe Bank Deposits are better than Corporate Deposits as they can be withdrawn and cancelled prematurely but very few corporate deposits offer this advantage as most of them are for a fixed period with no option of redeeming before the expiry of the term
krishnan s
1 decade ago
corporate deposits are very unsafe and never to trust even the reputed companies . these deposits are treated as unsecured hence it is best to avoid them
Bank deposits are the safest bet because the govt will never allow banks to go bust. mMoreover deposits are covered upto 1 lakh by the deposit insurance .
Sundaram
1 decade ago
Is it true that there is a restriction imposed by the authorities that the maximum interest rate offered by Corporates cannot exceed 12.5% p.a.?
CGVenkatassubramanian
1 decade ago
How can compare appels and oranges.bank karur offers 10% for 12 months forall age groups.compareing with housing companies SORRY keep away from all the realesate company
AMARISH SHAH
1 decade ago
sir,
the inflation rate is going high and naturally investor like to invest in higher interest rate cos.
as you told that the risk should be minimise.
even there is one site if anybody has complain for non reciept of payment,they should approach -www.investorhelpline.in
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