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Company Fixed Deposits - Are they safe to invest in

16 Aug 20236 mins readBy MOFSL

Introduction

Fixed deposits (FDs) are among the most preferred investment options for many Indians, thanks to their stable returns and low risk. While banks are the most common go-to place for FDs, corporate FDs can also offer you handsome returns. But what exactly are company FDs? And are they safe to invest in? Let’s find out.  

What are company FDs?

Apart from banks, many companies and Non-Banking Financial Companies (NBFCs) can raise money through deposits. These deposits are known as company FDs. With a tenure ranging between a few months to a few years, company FDs offer higher interest rates than bank FDs.  

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While investing in company FDs can be ideal for achieving your short-term financial goals, the risk associated with them is also higher. An asset or collateral doesn't back FDs. Regarding bank FDs, the Deposit Insurance and Credit Guarantee Corporation of India (DICGC) guarantees at least INR 5 lakh per investor in case of default. Corporate FDs do not come with such insurance.

Is it safe to invest in company FDs?

Many are wary of investing in company FDs as they are not secured. However, it is essential to note that not all companies can issue such deposits. Only those who adhere to the Reserve Bank of India (RBI) rules and the Ministry of Corporate Affairs can issue company FDs. This is why, despite thousands of NBFCs in India, only a few offer FDs. 

Furthermore, companies must have a minimum credit rating defined by the RBI. Rating agencies like Investment Information and Credit Rating Agency (ICRA), Credit Rating Information Services of India Limited (CRISIL) or Credit Analysis and Research Limited (CARE) analyse the company records, interest rates and repayment history. Credit ratings indicate high safety against the principal and interest payment default risk. Depending on various criteria, a company can be rated as AAA, AA, BBB, etc. These rules ensure that your money is safe while investing in company FDs. 

While AAA is the highest rating, a company must have a minimum rating of BBB to offer FDs to the public. You can check the company ratings before committing your money to make an informed decision. 

Factors to consider before investing in company fixed deposits

Now that you know the risks associated with company FDs, keep in mind the following points before investing:

  • The interest rates on fixed deposits vary from company to company. So before investing, compare different options and check if the company has CRISIL, CARE or ICRA ratings. A company having an AAA rating can be the best bet.
  • Don't rely on the ratings alone. Carefully analyse the company's financial health, profit and loss history and future plans to make a more informed decision.
  • Remember to conduct a risk-return analysis before investing your money in company FDs.
  • Similar to bank FDs, company FDs may also penalise premature withdrawals. Hence, know the penalty before choosing a company to invest in.

Conclusion

Company FDs can be a valuable addition to your investment portfolio if you have a moderate to high-risk appetite. Like bank FDs, market volatility or interest rate fluctuations do not affect company FDs. However, it is crucial to remember that some risks are associated with company FDs. If a company's financial health deteriorates, the FDs can become prone to the risk of default. So, researching the company is essential to make a wise decision. 

Don't get attracted to company deposits that promise high returns. A company must have a high credit rating even if you must compromise on interest rates. Also, ensure the company operates and generates profits for at least a few years. It is also advisable to put a limited amount of money in company FDs instead of all to diversify your risk. 

Open a Demat account with Motilal Oswal and start investing in corporate FDs. 

 

Related Articles: How to Open a Demat Account Without a Broker | Factors to Keep in Mind While Opening a Demat account | Factors to Consider When Opening a Demat Account | 10 Points to Remember When Operating your Demat Account | Types Of Demat Account & Trading Account

Disclaimer: The stocks, companies, or financial instruments mentioned in this blog are for informational purposes only and should not be considered as investment recommendations. It is advised to consult with your financial advisor before making any investment decisions. Investment in securities markets are subject to market risks, read all the related documents carefully before investing. Investors are strongly encouraged to carefully read the risk disclosure documents prior to participating in market-related investments or trading activities. Due to the volatile nature of financial markets, no guarantees can be made regarding investment returns. Motilal Oswal Financial Services Ltd. does not offer any assured returns on market-linked securities. Please note that past performance of stocks or indices is not indicative of future results.
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