The Most Authentic Guide on Personal Finance and Investments


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Company Fixed Deposits are toxic investments, avoid

Three important fixed-income product categories include
- Bank Fixed Deposits (incl. Post Office Schemes)
- Company Fixed Deposits (incl. NCDs)
- Debt Mutual Funds

In your best interest, I would strongly advise you to NEVER invest in company fixed deposits.

Of course, I have very valid and irrefutable reasons to make such a dramatic statement:

1. Company FDs are extremely risky
Suppose you run a company and want to borrow money for its day-to-day operations. What would you do? Naturally, you will approach a bank. Simply because (a) they offer loans at very competitive rates and (b) it is lot more convenient to deal with a single entity.

Whereas, raising money from the public, through a fixed deposit scheme, is a lot more cumbersome process; and expensive too. No one willingly pays a higher rate of interest.

Then, why do companies come to you for money?

No marks for guessing:

Because, banks have refused them any money. Even if they have lent them earlier, they don't wish to increase the exposure. And why would any sane bank let go of a business deal? Reason - risk! Banks don't want to expose themselves to too much risk.

So the companies have no option but to issue fixed deposits to the public. And, to be more attractive than the bank fixed deposits, they have to offer you higher interest rates. Hence, you will generally find that interest rates on Company FDs are 2-4% more than the banks. 

Companies don't offer you higher rates because they love you...
... but because they don't find any cheaper lenders.

So tell me, how wise it is to lend money to someone, whom even banks are wary of giving money?

Apart from these high-risk but genuine businesses, there is no dearth of shady companies. Their only objective is to lure you with high interest rates and then run away with your money. In short, Company FDs are too risky.

You, of course, are well aware of the safety of bank deposits. And your money is quite safe in debt mutual funds too, as the investment is made only in highly rated companies and professionally managed.

say-no-to-company-fixed-deposits
Strict Warning for you against investing in the Company Fixed Deposits.

2. Company FDs are completely unsecured deposits
Your fixed deposit with banks is insured up to a sum of Rs.1 lakh. Sure, given that people have much larger amounts as deposits, this small cover is rather inconsequential.

However, past experience shows that Governments world over normally do not allow the banks to fail and go bankrupt. Such instances can have serious repercussions. Therefore, more often than not, Central Banks like Reserve Bank of India, facilitate merger of such weak banks with the strong ones. This ensures that your deposits with banks are quite safe.

Debt mutual funds too are quite safe from default risk, as the portfolio is diversified across many companies.

Company fixed deposits, on the other hand, enjoy no security at all. In legal terms, they are "unsecured" borrowings of the company. This means that if the company goes bankrupt and its assets are sold to repay the lenders, you stand last in the queue. Secured lenders have the first right on this money. Their dues will be paid first. Thereafter, if any money remains, the same would be distributed among the unsecured creditors like suppliers and depositors.

Therefore, if companies fail — which isn't rare — there are good chances that you will get practically nothing back.

3. Company FDs rank high on illiquidity
It is very easy and simple to close your bank fixed deposits prematurely. Banks may or may not charge you a penalty. But you will definitely get lower rate of interest, due to the reduced tenure.

It is very easy and simple to redeem your debt mutual funds. Beyond a pre-specified period (from few days to few months), there is no exit load. More importantly, there is absolutely no loss of interest due to early redemption.

But, try withdrawing your Company Deposit before maturity:

A penalty of 1-2% is certain...
Plus, lower rate of interest due to shorter tenure...
Plus, lots of paperwork and follow-up...
And, finally... you may see your money after many weeks.

4. Company FDs have tedious TDS
If your interest income from a Company Fixed Deposit is more than Rs.5000 in a given financial year, it is subject to tax deduction at source. So, even for a nominal deposit of just Rs.50,000 to Rs.60,000 you will have to follow-up with them to get your TDS Certificate. This, as practical experience goes, is a herculean task.

Of course, Bank FDs too attract TDS provisions. But there is one small consolation... for banks the TDS is applicable when the interest income exceeds Rs.10,000 in a year. Moreover, it is lot more easy to follow-up with banks to get your TDS Certificate.

Best in this regards, are the debt mutual funds. There are no hassles of TDS with them as they are exempt from TDS provisions.

VERY IMPORTANT
Having advised you not to invest in Company Fixed Deposits, it is necessary that I should offer you the alternatives.

Option 1: Try debt mutual funds. Not only are they quite safe, but would probably give you TAX FREE returns too. [Read 'How To Earn Tax-Free Risk-Free Income']

Option 2: Try arbitrage funds. These are specialized funds about which I had written two extensive blog posts, viz.
- Arbitrage Funds : Excellent Way To Park Short-Term Money
- Baffled By Arbitrage Funds? Here's The Simple Explanation

Option 3: If you still want to invest in company deposits, at least give preference to Non Convertible Debentures (NCDs) over Fixed Deposits (FDs).

Option 4: In case you don't like any of the above options, please be contended with lower returns and stick to Bank FDs. I don't want you to unnecessarily lose your precious money.

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