Company fixed deposits in India are often a favourite amongst investors who are risk averse and want to take an exposure to fixed income instruments and are not satisfied with bank fixed deposits. While this is fine, there are certain risks to be aware of and if adequate research is done before investing, company FDs can offer you good returns. Updated 21 June 2020.
This link gives ou latest interest rates prevailing for company fixed deposits. Updated Company Deposit Rates.
Let us take a quick look at what these are and what risks to be aware of.
What are Company Fixed Deposits in India ?
In a manner similar to fixed deposits offered by banks, companies also offer you to deposit money with them. Such deposits are called company deposits or CDs. Needless to say, they are offered at a particular rate of interest and for a fixed number of years (tenor).
The question you might ask is why would a company offer a company FD ? The answer is that because it needs money from investors like you and me. The money so collected can be used for the company’s expansion. The company might use it to grow itself with an eye of becoming a bigger and better company.
It could also need the money to clear off debt that it has. The purposes could be many but the key principle to note is that in case the company wants to raise money, it can come and offer you an attractive company FD.
How interest rates of Company Fixed Deposits in India Decided?
As with most things, the interest rates offered by companies depends on two main factors. Note that there are a host of other reasons as well but these are the main ones.
The first is the urgency with which the firm needs the money from you. The more urgent it is, higher is the interest rate. That is because, in its desperate attempt to raise cash, the company will be willing to pay a higher interest rate than what competing firms are paying.
The second reason is the time frame for which the firm wants the money from you. The longer the time frame, the higher is the rate of interest.
Default risk that company deposits carry
Here is where you need to keep your head grounded a bit as company fixed deposits in India carry many risks.
The most important risk is default risk. This means that once you make a deposit with a company, it may default on its promise to return you the capital along with interest. Once that happens. recovery of money is a pain.
Remember that company deposits are not secured so in case of a default risk, you do not get the advantage of recovering your money first – it is the secured creditors who get that option first. And of course, you can go to the court demanding your right but we all know how the law of the land proceeds in our country.
If you for a moment compare the default risk with bank fixed deposits, then note that banks offer a Rs 1 lakh security per branch, company FDs do not carry such guarantees.
How to choose a company fixed deposits in India or CFD?
Make sure you do enough research on the following points before you go for a company FDs.
Check credit rating
CRISIL and ICRA provide credit ratings for companies. Being an independent research, you can bank on them to some degree. Higher the credit rating of the firm, less is the risk you carry.
Avoid low rated companies and small firms that can vanish overnight. Go for high rated companies that have strong fundamentals. Also remember that not all firms can accept deposits from investors. Only those companies registered with the Company Act 1956 can do so.
Management credibility
As with stock investments, go with a company whose management is flawless, trustworthy and ethical. If the management is doubtful, do not invest even if the interest rate is higher.
I would rather go with a bigger firm like ICICI Bank with 8% rate of interest than with Dubious Ltd with 15%.
Diversify
I have noted that a lot of my investors put a lot of their money in single companies. If this company were to go bust, your personal net worth would be eroded. So make sure you diversify across many companies. Do not put more than 10% – 12% in one firm at a time.
Better still, make sure you diversify across different investment avenues in the fixed income category. Fixed deposits cannot be the only products you go for.
Others
Other factors to consider is that one should pick a tenure which is not too long. Over a period of 5 years, the fate of a company can swing like a pendulum. The question is, do you want to take that risk ? True, a large tenure carries a higher interest rate but ask yourself whether you have the ability to do periodic reviews of the fundamentals of the company. If not, opt for a smaller tenure so that you are safer.
Go for healthy sectors which are stable and not volatile. If you pick up a sector that is notorious for stability, your money will be at risk all the times.
Lastly, do not go with unknown companies just because they offer a higher rate of return but carry more risk. Don’t be greedy. It is better to be safe than sorry.
This article would be complete if you can give the list of companies and their rate of interest that is offered currently.
And, how to invest in them (mode of investing).
I can understand its a primer but a link containing the above information would be really helpful. May be the related topic for the next post.
@Manickkam, Honestly, there is no single way to do that. I wish there were an aggregator to do the same thing.
Try ratekhoj.com – I am not sure how current it is.
If you get to know of anything more useful, let me now. I would love to learn from you.
Ratekhoj.com does give the FD rates of the company. Hope We can use that information and go to the company’s site directly and check if the FD is still available.
Its really useful. The link is http://ratekhoj.com/fixed-deposits/fixed-deposit-rates/fdresults-location.php?post=Submit+your+choices&duration=all+periods&allbox=all+institutions&inst%5B%5D=Public+Sector+Banks&inst%5B%5D=Indian+Private+Sector+Banks&inst%5B%5D=Foreign+Banks&inst%5B%5D=Cooperative+Banks&inst%5B%5D=Post+Office+Schemes&inst%5B%5D=Companies&amt=all+deposit+amounts&citizentype=non-senior&citystate=&sorttype=rate&sortorder=DESC&filewrite=0
@Manickkam, Your website is interesting, what do you do Manickkam and where are you from ?
@Radhey Sharma, Thanks. I am from Chennai and working as a software professional.
Radhey,
Thanks for the information. Yes investors need to be very cautious investing in companies with no track-record. Now adays you get more information from media/print. However the same was not 15-20 years ago. My parents had invested a significant amount in FD of companies based in Hyderabad who later vanished and cheated investors.
I am very happy to earn 9.5 – 10% interest investing in bank deposits.
Rakesh
My first reaction on seeing this post was “Radhey wrote this article for me”!! I have had quite a few exposures in such FDs and it is now only that in the hindsight I understand the risk I had been living with.
Pretty informative article Radhey. I knew something like CDs existed but wasn’t aware of all these details especially the risks. I thought they also have some governing body like banks but if they can disappear overnight with investors money, I doubt my assumption.
Do you know people who have invested in CDs and earned good returns? Do you recommend this product to your clients?
Is the extra 2% return worth the risk?
@Vivek K, Nopes, usually we don’t end up coming to company FDs at all !
@Vivek,
Yes I do invest in CD’s but have reduced the investment over the last few years as the same was shifted to Co-op Bank Deposits. I had invested in CD’s of HDFC & Tata. Few months back i invested in Muthoot Finance Deposit @ 13.25 % interest for 2 years. I know the risk associated with this company but i invested small amount.
@Rakesh, CD of HDFC? Why would HDFC launch something like this to give competition to their own FD business? Sounds a bit strange to me. What returns are they offering?
@Vivek,
CD’s of HDFC was few years back, i am not sure whether they still have it. I switched to co-op banks as the returns were more.
@Radhey,
All FD’s are not bad there are still very good companies providing FD’s namely Tata’s. We can safely invest in them.
@Rakesh, Do you invest in CDs? Can you share how the investment is done and how do you get the returns?
I doubt if Tata would run away with people’s money. Is there any other company with the same caliber and reputation?
@Rakesh, Did not mean to say all FDs are bad, apologies if that was the case.
Is there a way how we can track these companies, get our money back. The companies which we had invested was based in Hyderabad and last we heard was the Official Liquidator was looking into it.
@Rakesh, I think it is a big risk to invest in some small unknown company in another city. Even if there is some governing body, they will take their own sweet time to nab the company owners. If you are lucky to get your capital back, it’d have lost its worth by then.
@Vivek,
It’s been over 15 years since this incident, we have lost hope.
@Radhey,
Not sure about how the comments/reply are ordered. When i click on Reply and enter my comments it is displayed somewhere else rather than to the person intended to.
@Rakesh, I think the lesson learnt is to stay away from CDs and stick to FDs, even though returns are slightly on the lower side.
@Vivek,
Not all FD’s are bad though. HDFC Ltd is still offering 9.5% for 1 year so is Mahindra & Mahindara. DHFL is offering 10.25% but that is more risky.
Since these rates are in par with banks it makes sense to open Bank FD’s and also RBI guarantees deposits up to Rs. 1 lac.
@Rakesh, Yes, there are lot of banks who are offering 9.5-9.75% returns on FD today. Much safer, much reliable, I don’t think it makes any sense to take so much risk for 1-2% extra in CDs.
Investing in good Companies is not a bad idea I think, Mahindra Finance has the highest safety rating for its corporate deposits and Dewan Housing has the second highest. Investing in CDs of companies without any rating is a big No No, though.
@Praneet,
Only ratings should not be considered while investing in CD’s. We should also at companies books of accounts.
Those can be manipulated. case in point Satyam
Yes, books of accounts can be manipulated so are ratings. Ratings are done by third parties namely FundsIndia, Valueresearch and so on. So they would recommend products where they get more commission.
I have invested in HDFC Fixed Deposits and till now have had no problems at all. I am planning to invest in FDs of Mahindra Finance and Dewan Housing (only these 2). What would the experts suggest?
I used to invest in HDFC & Tata few years back and both are very good companies. What is the rate of interest offered by HDFC? HDFC bank also offers 9.25 for one year. I have invested in the same and its very convenient to book an FD online.
Monthly Interest – 9.4% P.A
Yearly (Annual) – 9.75% P.A
Cumulative – 9.75%
All of the above are for a term of 59 months
@Praneet,
9.75% for about 5 years i feel that’s less, if you are looking on tax savings point of view then you could invest in government bonds.
You can also look at Govt. tax saving bonds which were launched recently namely REC, PFC, etc. You can buy them online.