PARITOSH V TRIVEDI
January 27, 2011 11:33 am
WHAT IS CORPORATE FIXED DEPOSIT? HOW TO DO? IS IT SAFE? KINDLY ADVICE
Kirloskar Electric Co. Ltd(kirloskar-electric.com) (Head Office: BANGALORE) is offering 11.5% interest for 1-yr and 12% for 2-years FD scheme. Check the above said website for more details and to download the application form. Min. investment required=Rs.50000/-. Kindly inform me any other such south-india based companies.
Company FD definitely has a place in a well diversified portfolio (income oriented), but dont go for high interest (means higher risk) FD. There are lots of well known stable companies offering FD.
Why do companies offer FD? – To tap the capital for growth/expansion and to diversify their borrowings. Banks are very very strict (not always) and companies have to satisfy their leverage ratios and be within the limits all the time. If they issue FD, no need to bother about leverage ratios as long as they pay the interest regularly and the maturity amount at the end of term. Here is the risk and as long as the company makes better returns than the cost of borrowing, all will be fine. Risk is higher with smaller/speculative companies.
I presume company FD are unsecured and bonds are secured (there are unsecured bonds/subordinated bonds etc) – not sure about that. The bond market in India is not mature and has poor liquidity. But things will change in the future.
Corporate fixed deposits are normal fixed deposits offered by Companies. The interest rates offered are generally higher than Bank interest rates and can be in range from 9%-16% . Higher the interest rates offered higher are the risks involved. Why do companies have these deposits? when companies have cash crunch and require money, they can offer deposits at attractive rate of interest to common public, one of the reasons for this can be that they do not want to raise the additional capital by issuing shares. Corporate Deposits are governed as per Section 58A of Companies Act, however these are “unsecured” loans .
Risks with Company Fixed Deposits
There are two main risks associated with Company Deposits , they are :
A) Default Risk : These Company deposits carry a risk called Default Risk, which means, at maturity they might not be able to return your maturity amount and default in the payment. It can happen that company is out of cash at that time or does not have sufficient money in their hand to pay back , this can happen for many reasons like their business might not be going good that time or because of recession .
B) Unsecured Deposits : Bank Deposits are secured by RBI up to 1 lacs rupees per branch, which means that if bank does not return you the money or goes bankrupt, RBI will pay you up to 1 lacs of deposits. There is no such Insurance on Company Deposits, hence they are totally unsecured .
Read more : https://www.jagoinvestor.com/2010/04/are-company-fixed-deposit-safe.html
THANX MANISH FOR UR REPLY.I WANT TO INVEST RS 7000O FOR 2 YEARS ? WHERE SHOULD I INVEST TO GET HIGHER RETURN WITH MODERATE RISK.NO MATTER IF THE RETURN IS LESS COMPARED TO HIGH RISK FUNDS.SHOULD I GO FOR FD? SUGGEST ANY BANK OR ANY OTHER FUND.WHAT WOULD YOU HAVE DONE IF YOU WERE AT MY PLACE.I AM NEW TO INVESTMENT EDUCATION AND JUST GAINING KNOWLEDGE FROM PEOPLE LIKE YOU.I AM ALREADY HAVING MF IN HDFC TOP 200,CANARA ROBECO EQ DIC AND HDFC PRUDENCE
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