A company deposit, is one in which a company, that is allowed to raise deposits as per the law, raises money from investors.
It has to comply with various regulations laid down from time to time, including capital requirements. Bank term deposits as you all know, are term deposits by banks that are open throughout the year.
In any case here is a quick difference between bank deposits and company deposits:
|Bank deposits||Company deposits|
|Bank deposits are relatively safe. ||Company deposits are not safe.|
|Bank deposits are insured for deposits up to Rs 1 lakh.||No such insurance is provided.|
|Bank deposits are not rated by the deposit rating agencies.||Company deposits can be rated by Crisil, ICRA, Care and other rating agencies.|
|Interest rates offered by bank deposits are lower than those offered by company deposits.||Relatively higher than bank deposits.|
|Deposits so raised have to be in compliance with RBI rules and regulations||Have to meet compliance of the company law.|
|One does not hear of reputed banks defaulting on payment of interest and principal amounts.||You often hear of defaults on interest rates and principal amounts.|
So, should you invest in bank deposits or company fixed deposits?
You often hear this question being asked frequently, whether you should invest in company fixed deposits or bank fixed deposits. The answer is simple - just weigh the risks vs returns. Now, let us cite a few examples. A bank fixed deposit with State Bank of India fetches you an interest rate of 7.5 per cent, which is the best from the bank.
Now, there are many company fixed deposits, that can offer you at least 9 per cent interest. Two classic examples are deposits from KTDFC Fixed Deposit and Mahindra Finance.
Clearly, you will get 1.5 per cent higher interest rates on these deposits as compared to banks.
As we said before company fixed deposits are risky. But, you are getting 1.5 per cent extra by way of interest. So, you need to take a calculated risk. KTDFC, is a government of Kerala undertaking, and the government of Kerala has guaranteed the fixed deposits. So, it is safer than a bank deposit.
It's very unlikely that a company like Mahindra Finance would default on its fixed deposits. Hence, investing in a company deposit with a calculated risk can sometimes be a better proposition. Look for the rating in the company deposits at all times. Other highly rated companies incude ICICI Home Finance, PNB Home Finance, Bajaj Finance and HDFC among others.
Coming back to the difference between bank deposit and company fixed deposit, the most important thing is the interest rate and the risk. The former pays you less interest rate with less risk. The latter pays you more interest rate with a slightly higher risk. As mentioned, the risk can be calculated and you need not have sleepless nights for investing in a company deposit.