If you want to earn higher returns than bank fixed deposits, you might have considered investing in company fixed deposits. Before considering an investment in company FDs, it is crucial to understand what they are, how they work, and the associated risks. This article aims to provide you with comprehensive knowledge about company FDs and offer guidance on safety.
What are Actually Company FDs?
Corporate fixed deposits (FDs) may seem similar to bank FDs, as they both offer a fixed interest rate for a specific period. Nevertheless, it's important to note some significant differences between the two.
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- Unlike bank FDs that are regulated by the Reserve Bank of India, company FDs are governed by the Companies Act of 2013 and overseen by the Ministry of Corporate Affairs.
- Unlike bank FDs, company FDs do not provide this level of security.
- Due to their higher risk and lesser liquidity, company FDs generally offer more attractive interest rates than bank FDs do.
Is It Safe to Invest in the Company's Fixed Deposits?
When considering investing in company Fixed Deposits (FDs), several factors need to be considered for safety. These include the financial stability and reputation of the company, the credit rating of the FD scheme, the duration and interest rate of the deposit, as well as current market conditions.
It's important to note that company FDs carry more risk than bank FDs, as they are more likely to default or delay payments on interest or principal. Therefore, conducting thorough research before investing is crucial.
Things to Keep in Mind Before Investing in the Company FDs.
Other than conducting your due diligence on the firm and its FD scheme, there are other items to consider before investing in company FDs.
- Spread your risk among firms, sectors, ratings, tenures, and interest rates by investing a modest percentage of your assets in corporate FDs.
- Compare corporate FD schemes' characteristics, benefits, downsides, ratings, returns, and dangers.
- Don't lock up your money. Choose a shorter tenure to meet liquidity needs and capitalize on interest rate changes.
- Avoid monthly or quarterly interest payouts and choose cumulative interest. Choose compounded, maturity-paid interest as it increases returns and reduces taxes.
- Consider your investment's tax ramifications. Company FDs are taxed under the income tax slab. If your annual interest income exceeds Rs. 5,000, you must pay TDS.
Final Thoughts
Indian investors choose company FDs since they yield more than bank FDs. They also face default, delay, liquidity, and tax issues. Therefore, corporation FDs should be invested in with caution. Research the company and its FD plan, compare possibilities, diversify your portfolio, choose a shorter tenure, choose a cumulative interest, and examine tax implications.
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