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Dos and don'ts of investing in company FDs

Last updated on: January 21, 2010 09:32 IST

Dos and don'ts of investing in company FDs

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Sheetal Jhaveri

Many an old timers have lost their entire corpus by investing in company fixed deposits. No one could forget the great default of Roofit Industries or Cable Corporation of India. But today once again company fixed deposits is making a comeback and has gained momentum. So what are they and should you invest in them or not?

If yes then what are the factors based on which you must select company deposits. Let's take a look:

What are company fixed deposits?

Similar to bank fixed deposits these are offered by a company at a fixed rate of interest to its investors. Generally, the rate of interest offered by the companies is higher than what your banks offer on a normal fixed deposit.

The next question you might ask is: Why do they give a higher rate of interest compared to banks?

That's because company fixed deposits are unsecured debt instruments unlike bank fixed deposits where the Deposit Insurance and Credit Guarantee Corporation of India guarantees repayment of Rs 1 lakh in case a bank defaults. Companies offering this product offer no such guarantee and the safety of your deposit depends much on the financial health of the company.

Click NEXT to read how to select a right fixed deposit scheme of a company.

The author is a certified financial planner and can be reached at dhanplanner@rediffmail.com.


Photographs: Rediff Archives
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Check the credit ratings

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So how do you know whether to invest in a company fixed deposit and if yes how to select the right one?

First of all just because they come with higher risks investing in company fixed deposit should not be completely ruled out. However, a little homework is called for before finalising on investing in them. Although complete risk cannot be ruled out it can definitely be reduced to a great extent with proper homework.

Here are a few pointers that will help you to select the right deposit schemes:

Credit ratings: A very important indicator. It highlights the underlying risk of the company. AAA rating denotes the highest safety. It indicates the financial health of the company and the ability to service its financial obligations. In simple words, AAA rating indicates that you can trust a particularly rated company with yoru money and expect it to pay the interest amount due to you.

The higher the rating, higher is the safety. FAAA and LAAA/MAAA are the highest ratings as provided by CRISIL and ICRA.

CRISIL and ICRA are India's leading credit rating and research institutes. They do a detailed research of the company and then rate them. Any company's fixed deposits assigned ratings below LAA/MAA or FAA (that is FBBB or below) should be avoided at best.

Click NEXT to read when to get out of a company fixed deposit scheme.

The author is a certified financial planner and can be reached at dhanplanner@rediffmail.com.



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Other important factors to consider

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Also, it is very important to keep a track of the rating changes. Any downgrade in the ratings of the company you have invested in should ring an alarm. The corrective action is to ascertain the reasons behind this downgrade and then decide if you want to stay invested or get out.

Rate of return: Again any company offering a very high rate of interest should be a cause for concern. Companies generally offer high rate of interest to make up for the perceived risk attached with their offerings. So again don't get carried away with high rate of interest as they always come with high risk. Avoid investing in any company's fixed deposits that offer rate of interest higher than 13 per cent.

Promoter credibility: Promoters play a substantial role in making or breaking a company. So always do a background check on them. Promoters with dubious or shaky records should be strictly avoided. Doing a background check on promoters is easier said than done so the safer route is to invest in fixed deposits of a blue-chip company.

Past records: Although past performances are generally not considered a very good indicator of the future of a company one should not completely avoid it. Any investor must check the past payment history of the company. Also check the investor service standards of the company.

Tracking the company: Unlike bank fixed deposits where once you invest you generally tend to check on them only at or near its maturity. Your job does not end at only investing. You need to keep a track of the company as well as the credit ratings of the fixed deposits you have invested in. Although negative news does not mean that your company will default it definitely pays to be informed.

It is best to withdraw money from the company if it's in some kind of financial trouble. Generally if you wish to withdraw money in between the tenure, you do not earn interest on it. You should always check this point when you plan to invest.

Remember that in case you are investing in company fixed deposit it is safer to invest for the short-teerm, that is, for a 1 to 3 year period rather than remaining invested for 5 years or more.

Another important point to consider is that the rate of interest on company fixed deposits is taxable depending on your tax slab. Consequently, if the rateof interest offered are higher than your normal bank fixed deposit, post-tax return will be high. So is the risk involved.

God forbid, but in case of defaults here a few things which you need to do. You might not see your money or even if you do it might be a year later but there is no harm in trying.

FIR: All the major cities have an economic offence wing for all white-collar offences. Individuals should definitely file a first information report with the EOW.

Regulators: There are regulators to keep a check on any frauds or mishandling of public money by companies or mutual funds or exchanges. So in case your company defaults check who the regulator is and lodge a complaint with them. For listed companies you can file your complaint with the Securities and Exchange Board of India. For manufacturing companies it is Department of Company Affairs. For banks and non-banking financial companies it is the Reserve Bank of India.

Investor forums:  There are investor forums that protect the interest of investors. Find out the forum in your area and do register a complaint with them. They will help you press charges against such defaulters.

The author is a certified financial planner and can be reached at dhanplanner@rediffmail.com.



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