Fixed income products form the base of a financial plan. If the base is not strong whatever we build upon it is at risk of collapse, therefore allocating a higher quantum of funds towards fixed income products improves the overall stability of a portfolio.

 

Company Fixed Deposits

Fixed Deposits in companies that earn a fixed rate of return over a period of time are called Company Fixed Deposits. Financial institutions and Non-Banking Finance Companies (NBFCs) also accept such deposits. Deposits thus mobilized are governed by the Companies Act under Section 58A. These deposits are unsecured, i.e., if the company defaults, the investor cannot sell the documents to recover his capital, thus making them a risky investment option.

 

Benefits of investing in Company Fixed Deposits

•  High interest.

•  Short-term deposits.

•  The Lock-in period is only 6 months.

•  No Income Tax is deducted at source if the interest income is up to Rs 5,000 in one financial year

•  Investment can be spread in more than one company so that interest from one company does not exceed Rs. 5,000

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Like most investment options, Company Fixed Deposits are a mixed bag. Company FDs can be an interesting investment option if you know how to select the right FD, and how to avoid the not-so-good ones. Here are some of the points that investors should keep in mind.

 

Spread your Risk

The deposits should be spread over a large number of companies engaged in different industries. This way, you’ll be able to diversify your risk among various industries/companies. Try not to put more than 10% of your total investments in one particular company.

 

Choose the Right Period of Deposit

Ideally, the investment should be for 1 to 3 years depending upon the rate of interest.

 

Periodic Review

The performance of the companies should be reviewed at maturity. This will help you decide whether to renew or reshuffle the deposit. It is also wise to keep a track of these companies by checking their share prices, annual reports, and other details reported in newspapers.