Oct 10, 2009

Benefits of Company Fixed Deposits

Company Fixed Deposits In India

Company Fixed Deposit market in India has an interesting phase of evolution. It basically grew out of the need of Corporate Sector for raising short term finance and requirements of small investors to earn superior returns as compared to returns offered by the Banks. The concept of company fixed deposits was started in india in 1964 by Bajaj Capital Ltd.by launching first ever Company Fixed Deposit of Oberoi Group - East India Hotels Ltd.(now EIH Ltd.).The success of East India Hotels prompted others private and public sector companies which started accepting deposits from public.

Since then company deposit market has grown by leaps and bounds. Today, company deposit market has grown to approximately Rs.25,000 crores. Hundreds of top companies belonging to reputed industrial houses like Tata, Birla, Escorts, Godrej etc. and government companies like HUDCO are accepting deposits from public. The number of depositors have increased to around 5 million.

The benefits of company deposit are numerous like superior returns from reputed companies, fixed and assured returns, premature encashments, simplicity of transactions, TDS benefits, wide choice, All these features have made company deposits a preferred instrument of investment.

Features:

  • Company Fixed Deposits are non transferable that means there is no fear of FD receipt being stolen. In case it falls into wrong hands ,it cannot be misused. The FD holder in such a case should write to the company which shall issue duplicate deposit receipt upon execution of an indemnity and cancel the previous one.
  • No income tax is deducted at source if the interest income is upto Rs 5000/-in one financial year.

One can spread his investment in more than one company, so that interest from one company does not exceed Rs. 5000/-

  • Further, advantage of investing in company fixed deposits is that one can analyse the company before investing in it because companies accepting deposits are old-established reputed companies with proven track records.
  • It is also important that company fixed deposit should be made for short term , i.e., tenure should be for 1-3 years depending upon the rate of interest.This will help the investor to switch to other company if need be
  • Recently, nomination facility has been introduced in company fixed deposits.

Where Not To Invest

  • Companies which pay a rate of interest higher than 14%
  • Companies which are not paying regular dividends to their shareholders. New companies belonging to first generation of promoters which have yet to prove their credit worthiness.
  • It is best to avoid private limited companies, and partnership firms and other un-incorporated bodies. Such companies are under no obligation to publish their balance sheets working results and it is, therefore, very difficult to judge their performance.
  • Companies whose balance sheets show accumulated losses.
  • Companies with a poor liquidity position and below investment grade rating.

How To Choose A Company For Making Deposit
There are many companies operating in Company Deposit market. Investors, however, have to be careful while selecting a company for investing their hard earned money. Following is a checklist for selecting good companies:

Period of Deposit
Ideally the investment should be for 1 to 3 years depending upon the rate of interest.

Periodic Review of the Companies
The performance of the companies should be reviewed at maturity i.e., whether to renew or reshuffle, the deposit. A watch should also be kept over the companies by checking their share prices, annual reports and other news reported in the commercial columns of daily papers.

Limits on raising Company Deposits
Manufacturing companies are permitted to mobilise deposits as indicated below :

  1. Upto 25% of their net worth from their public; and
  2. Upto 10% of their net worth from the share-holders and others.

Net worth means paid-up capital plus free reserves, minus miscellaneous expenditure, if any.

 

For Info. on FD's Visit @ : Invest in Fixed Deposits

 

Source: tax4india

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