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What is Corporate Fixed Deposit?

Corporate Fixed Deposit or Company fixed deposit (CFD) is a deposit with financial institutes and NBFCs for a fixed rate of return over a fixed period of time. The rate of interest is determined by the tenure of the deposit as well as other factors. The deposit made in a CFD is governed by section 58A of the Companies Act.

CFDs are a good option for investment as they provide higher rate of interest compared to bank deposits. They are a good source of regular income by means of monthly, quarterly, half-yearly, or yearly interest incomes. However, these deposits are not secured like those in the bank. In case of default by a company, the investor cannot sell the deposit documents to recover his amount. The investor has no claim over the assets of the company in case the company is wound-up. This makes CFD a risky option.

In order to protect ones investment from the risk, the performance of the company must be reviewed before investing. Also at the time of maturity, if you wish to reinvest your amount, check the company’s performance. Keep a regular check on the companies in which you plan to invest by keeping track of its balance sheet and share prices. This shall enable you to decide your investment in CFD.

The NBFCs that offer CFD has to get themselves rated by the rating agencies such as CRISIL, CARE, ICRA etc., but manufacturing firms have no such compulsion. Before you invest in any of the CFDs, check the company’s ratings. A company with the rating of AA is considered a good investment option. Also, checking the previous records of the company in terms of timely interest payments will help in determining which company to invest in.

Interest and Returns

The interest rates offered in company fixed deposits are higher than that offered by banks. The rate of interest can be in the range of 9-16%. However, higher the interest rate, more risk is associated with it. Thus, a company offering 15% interest rate would be more risky than that offering 11%. Before investing, ensure that you choose companies that have high ratings.

Benefits of Company Fixed Deposits

1) High rates of interest.

2) Stable source of income.

3) Sufficient safety as most companies are rated.

4) Flexible tenure ranging from 6 months to 7 years.

5) Only 6 months lock-in period

6) High liquidity - issuers offer loan against CFD and pre-mature withdrawal facility

7) No TDS in case the interest is only Rs. 5000 in a year.

8) Nomination facility.

9) Regular interest incomes - monthly, quarterly, half-yearly, or yearly.

10) Simple operational process - PAN not required

Methods for Good Investment

If you wish to have higher returns, you must take a little risk. And if you wish to avoid the risk, you must compromise on the returns. However, when deciding for your option for CFDs, it is important to know how to choose a right fixed deposit and how to ignore the wrong ones.

Here are a few tips to ensure higher returns with low risk.

Spread your risk - Spread your CFDs over a number of companies in different fields. Do not put more than 10% of your investment in 1 company. This will have two benefits. First, your risk will be diversified among various industries. Second, the interest from  company will not exceed Rs. 5000, and hence there will be no TDS.

Right tenure of Deposit - Ideally you must invest for a period of 1-3 years. Blocking your investment for more than 3 years in a CFD could be risky, because the performance of the company cannot be assured for that long period of time.

Periodic Review - Periodic review of the company must be done from time to time and at the maturity of the deposit. This will help you to decide whether you should renew or reshuffle the deposit.