A very high percentage of Indian household savings are being invested in Bank Deposits. For most of the investors safety of capital and guaranteed investment returns are the top most priorities.
In recent years, investors have started taking a hard look at Company Fixed Deposits too. The Company FDs are similar to Bank FDs. The interest rates offered on Bank time deposits have been moving southwards and this is making many retail investors to look out for better alternatives to Bank deposits.
So, what are these Corporate Deposits? – The deposits placed by investors with companies for a fixed term carrying a prescribed rate of interest is called Company Fixed Deposit. Financial institutions and Non-Banking Finance Companies (NBFCs) accept such deposits
You might have seen the Company Fixed Deposit Schemes advertisements on websites/newspapers. Some of the popular Corporate FDs are – Shriram Transport Finance Unnati Scheme, Mahindra & Mahindra Finance FD, LIC Housing Finance FD etc.,
Why are corporate FDs preferred against Bank FDs by many retail investors?
Answer is, the company Fixed Deposit schemes offer higher interest rates when compared to Bank Fixed Deposits.
Best Company Fixed Deposit Schemes 2017
Some of the popular and top Company Fixed Deposit schemes that are currently open for subscription are as below ;
(Kindly note that the interest rates of PNB Housing Finance Deposits have been revised w.e.f 10-02-2017. Deposits of 1, 3 & 5 year with cumulative option will now have 7.25% as RoI and Deposits with non-cumulative option with monthly, quarterly, half-yearly and annual pay-outs will have RoIs @ 7%, 7.05%, 7.10% & 7.25% respectively)
But we all know that generally, the higher the risk of an investment, the higher the potential return. So, what are the risks associated with Company Fixed Deposit schemes? How to choose best corporate FDs? What are the factors that you need to look into before investing in Company FD Schemes?
How to choose best Company Fixed Deposit?
You can consider below points to identify suitable Company FD schemes.
- Interest Rates : Rate of interest is the main attraction of Corporate Fixed deposit Schemes. They try to offer interest rates that are higher than the average interest rates offered by Banks. But if a company is offering say 12% pa interest rate which is way above the prevailing deposit rates then it is advisable to be cautious.
- Time Frame Vs Interest Rate : Generally, longer the duration of investment, higher the rate of interest offered on Company FDs. The biggest risk on Corporate FDs is DEFAULT RISK. The company offering FDs may not service the interest/maturity payments. So, do not consider investing for longer duration like say 10 years or so.
- Diversification : It is better to invest in couple of good schemes instead of investing the entire amount in one scheme alone.
- Credit Ratings : Before investing in a Company deposit scheme, you have to look at the company’s pedigree and profile. You need to know why the company is accepting the deposits from the public. If you think it is not possible for you to do this homework then invest your time to understand the credit ratings that are shown by these FD schemes. Remember, if the credit rating of a corporate FD scheme is good then that particular scheme may offer lower interest rates when compared to a poorly rated FD scheme. So, higher the rating, lower the returns. Ratings are given by credit rating agencies like ICRA, CRISIL, CARE etc., Below are the credit rating scales for your information.
( ICRA credit rating scale :
MAAA – The highest-credit-quality rating assigned by ICRA. The rated deposits programme carries the lowest credit/default risk
MAA – The high credit quality rating assigned by ICRA. The rated deposits carries low credit risk.
MA – The adequate credit quality rating assigned by ICRA. The rated deposits carries average credit risk.
MB – The inadequate credit quality rating assigned by ICRA. The rated deposits carries high credit risk.
MC – The risk-prone credit quality rating assigned by ICRA. The rated deposits carries very high credit risk.
MD – The lowest credit quality rating assigned by ICRA. The rated instrument has very low prospects of recovery.
CRISIL credit rating scale :
FAAA – Highest safety rating – This rating indicates that the degree of safety regarding timely payment of interest and principal is very strong.
FAA – High safety
FA – Adequate safety
FB – Inadequate safety
FC – High risk
FD – Default – This rating indicates that the fixed deposits are either in default or are expected to be in default upon maturity. )
- Special Features: Some corporate FD schemes offer special interest rates for Senior Citizens, Share holders, employees of that company etc., Go through these details and avail these benefits. For example : All the deposit schemes listed in the above table offer 0.25% over and above the normal rates for Senior Citizens.
- Premature withdrawal : Most of the company Fixed Deposits Schemes have lock-in period (like 3-6 months). Also, they levy penalty charges for premature withdrawals. Do look at this clause before choosing the schemes. These details are provided in the Scheme’s application form.
- Calculation of Returns: ‘Rate of interest’ is the main selling point of these schemes. So, I have observed that these schemes generally highlight the Effective Annualized Yields. Let’s understand the difference between nominal interest rate and effective yield.
Example: Let’s assume that above are the interest rates offered by a FD scheme (Cumulative). They display Effective yields on deposits. If you observe the effective yield rates are higher than the interest rates. Lets us understand this concept.
As per this scheme, a Deposit of Rs 10k becomes Rs 15,742 after 60 months (5 years). It’s s a gain of Rs 5,742 (Rs 15,752 -Rs 10,000). One year gain is Rs 1148 (5742/5). In percentage term it is 11.48%, which is shown as EFFECTIVE YIELD.
Always compare two Company FD schemes in terms of nominal interest rates. Do not go by effective yields. Also, these yields are not tax adjusted.
- Taxation : Are company fixed deposits taxable? Remember that tax benefits are not available on company fixed deposits. TDS is not applicable on interest earned upto Rs 5,000 pa. You have to club the interest earned on these deposits as ‘income from other sources’ and file your annual Income Tax Returns.
- Type of Schemes : There are two types of schemes 1) Cumulative and 2) Non-Cumulative schemes. Under Cumulative Deposit scheme, the interest is paid along with the principal amount on maturity date. Whereas under non-cumulative schemes, the interest amount is paid periodically (monthly/quarterly/half-yearly/yearly). If you require money on a periodic basis then you can opt for non-cumulative option.
- Unsecured : Most of the Corporate FD schemes are unsecured investments i.e., if the company defaults, the investor cannot sell the documents to recover his capital, thus making them a risky investment option. In case of bank deposits, upto Rs 1 Lakh is guaranteed by RBI’s Deposit Insurance & Credit Guarantee Corporation (DICGC).
(You may like my visiting my post on ‘Are bank deposits totally risk-free?‘)
Is it possible to buy Company Fixed Deposits online?
Some of the popular Corporate Fixed Deposit schemes are now available online. You can invest in these company fixed deposits through online investment platforms like icicidirect.com, fundsindia.com, bajajcapital etc.,
I believe that the entire investment process is not completely online. The process may not be like the way you buy and sell shares. Some amount of offline work is involved. You will receive physical deposit certificate after the investment is made.
And before the Deposit maturity date, you have to physically courier the FD certificate to the company (Registrar). The company may directly transfer the monies online through Electronic Clearing System (ECS). If you have opted for non-cumulative schemes then company may pay the interest amounts through ECS or through Warrants (cheques).
How to check if a Company can collect Deposits from the public?
In India, Fixed Deposits or any kind of Schemes where an investor gets fixed rate of interest become an instant hit. Small time investors get attracted to high interest rates offered by the Companies and invest their hard-earned money in Deposits Schemes (Collective Investment Schemes).
Some of these entities are genuine and whereas some entities collect monies from the public without getting the necessary approvals from the Regulators.
To curb illegal and unauthorized pooling of funds by unscrupulous firms, the Reserve Bank of India has recently launched a website, www.sachet.rbi.org.in , which will facilitate filing, tracking of complaints, besides providing information about the entities registered with a regulator to accept deposits.
Below is the procedure to check if a company has got necessary regulatory approvals to accept deposits from the public;
Let’s say you would like to invest in a Fixed Deposit Scheme offered by Mahindra & Mahindra Financial Services LTD. You can follow below steps to check if this company (which is a Non-Banking Finance Company) is in the list of Registered entities to accept public deposits;
- Kindly visit Sachet portal
- Navigate to ‘Registered Entities’ section.
- M&M Fin Services Ltd is an NBFC and is regulated by the RBI. So, click on ‘RBI’ link.
- You will be redirected to RBI’s site. Click on ‘List of NBFCs holding CoR for accepting Public Deposits’ to download the list (excel / PDF format).
- You can notice that M&M Fin Services is holding CoR (Certificate of Registration) to accept Deposits from the Public.
- For More details on ‘Sachet’, kindly read this article @ ‘Sachet – RBI launches new Portal to curb Illegal Collection of Deposits / Money.’
Are Company Fixed Deposit schemes totally risk-free & safe ?
As discussed above, ‘default risk’ is the main issue here. There are many incidents where top companies were unable to honor the interest/maturity payments.
Investors of Fixed Deposit Schemes offered by Agrigold, Birla power Solutions, Kirloskar Investments and Finance, Micro Technologies, Plethico Pharma, Omnitech Info etc., are still fighting for their monies.
Do not invest in a company FD scheme which offers unusually high rates of interest. Avoid FD schemes offered by companies which you are not aware of. Do not invest in FD schemes which do not have credit ratings.
I personally believe that one can seriously look at other fixed income options like 8% GoI Bonds, Post office MIS, Senior Citizen Scheme, Secured Non-Convertible Debentures or Debt Mutual funds before opting for corporate deposits. The MF schemes are managed by professionals and they will do the required research on behalf of you. Some of the mutual fund schemes do invest in Company Fixed Deposit Schemes also.
Have you invested in any of the company fixed deposit schemes? Did you face any interest or maturity amount payment issues? Are you planning to invest in a FD scheme? Do share your views and comments?
( Image courtesy of Vichaya Kiatying-Angsulee at FreeDigitalPhotos.net)