Company Fixed Deposits – Advantages and Disadvantages

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Company Fixed Deposits are becoming increasingly popular with investors. According to estimates, Company FD currently total over Rs.60,000/- crore and are increasing at a rapid rate. It is estimated that about Rs.5,000/- crore are invested every year into Company FD’s. They have become increasingly popular these days because of the recent volatility in the stock markets, which has shaken confidence of many of the investors in them.

advantages and disadvantages fixed deposits

Fixed Deposits  can be issued by all companies whereas so far only financial institutions (like Industrial Development Bank of India) and public sector undertakings (like National Thermal Power Corporation, Indian Railways Finance Corporation, etc) are permitted to issue bonds.

It is to be noted that essentially Deposits and bonds are unsecured in nature whereas debentures are secured.

Advantages of Company FDs:

The advantages of company deposits from an investor’s point of view are:

  • HIGHER INTEREST RATES: Selected finance companies with highest credit rating are offering interest rates which is above what the banks pay for there deposits.
  • VARIETY OF DEPOSIT SCHEMES: Companies are free to design their own deposit schemes and most companies offer one of the following types:
  1. Monthly income deposits where interest is paid every month.
  2. Quarterly income deposits where interest is paid once in a quarter.
  3. Cumulative deposits where interest is accumulated and paid at the time of maturity.
  4. Recurring deposits similar to the recurring deposits of banks.
  5. Cash certificate schemes.
  • NO TAX DEDUCTED AT SOURCE: Companies do not deduct tax at source up to an interest income of Rs.5,000 per annum. Further, no tax is deducted at source if the depositor submits from 15H(duly filled in) even if the interest payable exceeds Rs.5,000 p.a. However, interest on company deposits is fully taxable, unlike interest on bank deposits and some other investments, covered under Section 80L.
  • OTHER ATTRACTIONS: Many companies have come up with servant other attractions to lure depositors:
  1. Allotment of safe deposit vaults on a preferential basis.
  2. Instant loan scheme.
  3. Premature withdrawal facility.
  4. Entitlement to future issues of equity shares, convertible debentures, etc., on a firm allotment basis.
  5. Free trips to company’s plants.
  6. Scholarships to depositor’s children.

Disadvantages of Company FDs:

However the investors are advised to remember that there are always two faces of every coin. With so many advantages listed above, Company Fixed Deposits surely looks an attractive investment option, but they have their inherent Disadvantages as well.

Look for the other post on this blog for the Disadvantages of Company Fixed Deposits.

Investor Education Series




Posted by Silki Garg   @   30 May 2010 3 comments

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