With the rising inflation, it is no longer beneficial to keep the money in bank accounts or as fixed deposits, as the interest earned on these instruments is not high enough. Eventually, your money loses value over time, instead of gaining. In this scenario, the investor should look at alternatives. Corporate fixed deposit is one such alternative. It combines the benefits of regular fixed deposits and corporate investment.
A corporate or company fixed deposit is run by corporate houses. The deposit is made for a fixed period of time. The rate of interest payable on this deposit is also decided beforehand. Various NBFCs and financial institutions accept such deposits.
These deposits are a safe form of investment as these are governed by law under Section 58A of the Companies Act. However, these deposits are not secured which means that the investor will not be able to recover their dues by selling the instruments, in case of the company default. In this way, Corporate Fixed Deposits follow the classic axiom of higher return and higher risk as compared to Bank fixed deposits. The investors need to analyze their risk taking capacity to decide whether they should invest in company fixed deposits.
However, there are a few points, the investors should keep in mind while making such decisions. A sound analysis before making the deposit can help the investors in multiplying their wealth without taking undue risks.
Research the Company:
Before making any such deposit, the investor should carefully research the issuing company. It is advisable to invest in well known and reputable companies and stay away from unknown and shady companies. Researching the company will also make the investors aware of the corporate objective and future growth prospects. This is essential to know to ensure the proper growth of the deposit.
The investor should look into the financial statements of the companies as well. It will help them in properly assessing the financial health of the company. If the company already has many financial obligations then it is not prudent to invest in such a company. The growth rate for the company should also be checked. Its revenue growth rate and net profit growth rate are good indicators of its future potential.
The investor should also look at the track record of its founders and top management. Their investors should remain vigilant against top managers with incriminating past records. Such a track record shows the high chances of default on current deposit as well.
Read the Fine Prints:
Investors should carefully read the offer documents. Proper attention should be paid to the reasons for which the company is raising the funds. Apart from looking at the financial standing of the company, it is also important to look at the financial feasibility of the project involved. The investors can greatly reduce the chances of default by looking at the fine prints and the details of the project.
Pay Attention to the Ratings:
Corporate fixed deposits are regulated to safeguard the interests of the investors. Companies are required to get the rating for their fixed deposits. RBI also requires the NBFCs to obtain ratings for the purpose of raising fixed deposits. AAA rating is generally considered to be the best and is virtually riskless. Investors should avoid investing in deposit schemes with lower ratings, even if these schemes offer high interest rates. If you have several companies with the same rating, then look at the past history of the company and its financial standing to make a decision about the deposit.
Investor Relations:
Apart from checking the financial and other considerations, the investors should also pay attention to the company’s track record of dealing with its investors. The investor relation cell of the company should be communicative and willing to respond to the queries of the investors. These factors should be taken into account before entering into a financial relationship with the concern.
Duration of the Deposit:
Owing to the inherent risk of company bank deposits, it is more prudent to invest in the deposit schemes with shorter duration. Instead of locking the funds in a 5 year scheme, choose the scheme with 1 or 3 year duration. This will keep the funds liquid. It is also easier to monitor the companies over a short duration of the time.
Seek Professional Advice:
Investment is an important task. While every investor should take due diligence and research well before making any investment, it is also important to take professional advice before making any big investment. Most professional advisors charge fees. However, the fee is generally more than worth it as such professional services can help the investors in earning higher returns. Before making any investment in fixed deposit, seek professional advice to reduce the risk of default and improve your returns.
