Fixed deposits have always been popular with consumers due to the several benefits that they offer. The underlying financial principle is simple: Place your money with a bank or financial lending institution and you are given proof of the deposit. After a certain period, you can withdraw your cash plus a good interest payment. The interest rate varied from lender to lender and usually, the financial authorities of the country fixed an average interest rate depending on the time of deposit and the amount kept as a deposit. Times periods usually varied from one month to 10 years and the interest rate was usually increased as time increased. People who kept larger deposits for a longer period were more likely to get better returns on their investments.
Times have Changed
As India’s economy opened up, the range of financial instruments available to everyone have also increased. One of the most attractive investment options available to consumers is company fixed deposits. Companies that require private investment but do not want to involve the banks raise money from the public using FDs and NCDs or non-convertible debentures. These deposits usually follow the same deposit periods as traditional banks.
Website Fundsindia.com states that manufacturing companies, non-banking finance companies, financial institutions, etc. can provide fixed deposit facilities to customers. These deposits are governed by the Companies Acts of 1956 (modified to Companies Act, 2013.) Company fixed deposits are a great way of making sure that your money gets better than average interest rates. The principle behind the deposits is much the same as a bank fixed deposit but with a few subtle changes:
- Better interest rates – Now banks are offering an average interest rate of about 8 percent for normal citizens and 8.5 to 9 percent interest rate for senior citizens. The national lending authorities establish this rate and it is the same with minor differences from bank to bank. However, private companies are not restricted by the lending authorities and they can provide a higher than normal lending rate. Private companies usually offer a 1 to 2 percent increased interest rate as compared to bank RDs, but they are legally restricted from increasing the interest rate more than 12.5 percent. Better interest rates attract consumer interest and it increases private investment in the company.
- **Safety **– Bank deposits are secured deposits protected by the government and the bank insurance company. However, most company deposits are unsecured. As per the Companies Act, 2013, there are provisions in place that will make every company deposit a secured deposit.
- Tax deductions – The exact tax deductions tend to vary every year. However, TDS or tax deduction at source is common. No tax is deducted if the income interest is limited to Rs 5000 or less in a single financial year. You can also think about diversifying your income into several different company fixed deposits to cover the tax requirements. However, if you have significant company fixed deposits in a single company like Unitech company fixed deposits, you should check with an accountant to understand how much you have to pay the tax authorities.
- Shorter periods – Company fixed deposits are usually of a shorter period. The minimum is usually six months but you can keep the money for a longer period if required. However, you should know that withdrawing your money earlier is difficult and you may have to wait for three to five months to get your money back.
Company fixed deposits are not very different from bank deposits. However, if you do your research correctly, there is a very good chance that you can double or triple your money in a short period.
Simple Rules to Protect Yourself
Although company fixed deposits are a good idea, investment website Jagoinvestor.com points out that it is your duty to be careful. Follow these simple points while choosing a company and you should be fine.
- Don’t fall for too high interest rates. Remember company fixed deposits are a way for the company to raise money for expansion. However, if they pay too high interest rates, they are not actually getting enough money to invest. Check with the Reserve Bank of India to find out about shady/ reliable companies to invest with.
- Evaluate the CRISIL ratings of the company. This is not mandatory but some companies get their FD policies rated by outside companies. Ratings of AAA+ or AA- are good. You can also check with the ratings offered by CRISIL and ICRA to evaluate the reputation of the company.
Diversifying your risk into many companies is always a good idea to protect yourself. Just make sure you research the companies and check the financial health of the company before you invest. Even after investment, follow the companies carefully and withdraw your money if you aren’t sure . After all, it is your money.