Fixed Deposits in companies that earn a fixed rate of return over a period of time are called Company Fixed Deposits. Financial institutions and Non-Banking Finance Companies (NBFCs) also accept such deposits. Deposits thus mobilised are governed by the Companies Act under Section 58A. These deposits are unsecured, i.e., if the company defaults, the investor cannot sell the documents to recover his capital, thus making them a risky investment option.

Benefits of investing in Company Fixed Deposits

High interest.
Short-term deposits.
Lock-in period is only 6 months.
No Income Tax is deducted at source if the interest income is up to Rs 5,000 in one financial year
Investment can be spread in more than one company, so that interest from one company does not exceed Rs. 5,000

Companies where you should not invest

Companies that offer interest higher than 15%. Companies that are not paying regular dividends to the shareholders. Companies whose Balance Sheet shows losses. Companies that are below investment grade (A) or less rating.There is an old saying [“Don’t Put All Your Eggs In One Basket”.] Company Deposits should be spread over a large number of companies. This will help you to diversify your risk among various companies/industries. Never put more than 10% of your total investible funds in one company. How to choose a good company deposit scheme ? Ignore the unrated Company Deposit Schemes. Ignore deposit schemes of little known manufacturing companies.  For NBFCs, RBI has made it mandatory to have an ‘A’ rating to be eligible to accept public deposits. One should go further and look at only AA or AAA schemes. Within a given rating grade, choose the company with a better reputation. Once you decide on a company, choose the schemes that have given a better return.  Unless you need income regularly, you should prefer cumulative schemes to regular income options since the interest earned automatically gets reinvested at the same coupon rate, resulting in better yields. It also gives you a lump-sum amount at one go. It is better to make shorter deposit of around 1 year to 3 years.  This way, you can not only keep a watch on the company’s rating and servicing, but also have your money back in case of an emergency. Check on the servicing standards of the company.  You should not invest in companies that care little about investor services, like promptly sending interest warrants or the principal cheque. Involve your Financial Planner / Investment Advisor for advice in all your transactions.  Do not bypass and invest directly. Check whether the company accepts outstation cheques and makes payment through at par cheques, especially if you do not live in the same city where the company is situated.