Investing in company fixed deposits? Dos and don'ts

The concept of a fixed interest investment with high security has long been the most attractive option for the Indian investor. As much as 60 per cent of one's savings find their way to the bank fixed deposit.

However, in the last one year, we have seen a significant drop in bank fixed deposit interest rates. With the rates being offered last year in the 8 to 9 per cent range there has been a significant fall this year to 6 to 6.5 per cent. This leaves investors looking for safer investment options to move to other pastures (Post Office deposits being one of them) or they can look at company fixed deposits.

Company fixed deposit is the deposit placed by investors with companies for a fixed term carrying a prescribed rate of interest. Used as a measure to build up capital for the company, these deposits offer high rates (as compared to bank FDs) of interest on investments.

Company FDs are primarily meant for conservative investors who don't wish to take the risk of vagaries of the stock market. But experts say the due diligence that an investor should undertake is similar to that before buying shares. Getting lured by the high interest rate alone is not advisable.

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Check on 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 your money and expect it to pay the interest amount due to you on time. CRISIL and ICRA are India's leading credit rating and research institutes. They do a detailed research of the company and then rate them.

Check on 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.

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Get lured by high interest rates

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.

The major risk in case of a company FDs is that if the company is unable to repay your money, you end up losing it. But in case of banks, the rules are stricter and your money is safe as the bank FDs are insured up to Rs 1 lakh.

Don't forget to check on past performance

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.

S/he should also check the investor service standards of the company.

Don't hesitate with regulator assistance

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.

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Here are six rules that will help you decide on a good company FD:

1. Ignore the unrated company deposit schemes. Ignore deposit schemes of little known manufacturing companies.  For NBFCs, RBI has made it mandatory to have an 'A' rating to be eligible to accept public deposits. One should go further and look at only AA+ or AAA schemes.

2. Within a given rating grade, choose the company with a better reputation.

3. Once you decide on a company, choose the schemes that have given a better return. Unless you need income regularly, you should prefer cumulative schemes to regular income options since the interest earned automatically gets reinvested at the same coupon rate, resulting in better yields. It also gives you a lump-sum amount at one go.

4. It is better to make shorter deposit of around 1 year to 3 years.  This way, you can not only keep a watch on the company's rating and servicing, but also have your money back in case of an emergency.

5. Check on the servicing standards of the company. You should not invest in companies that care little about investor services, like promptly sending interest warrants or the principal cheque.

6. Involve your financial planner / investment advisor for advice in all your transactions. Do not bypass and invest directly.     

Some examples of Corporate FDs