What are the risks associated with company fixed deposits?

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 What are the risks associated with company fixed deposits?
Company deposits it must be remembered are deposits that are not safe, as they are unsecured deposits. What this means is that an investor cannot sell his certificate to recover the money and it may also not be secured against the assets of the company.

This means if for some reason the company is not able to service the principal and also unable to pay back the same, your entire fixed deposit including the principal and accumulated interest could vanish. There have been several cases where people have not received their money in company fixed deposits and there are also reports of delayed payment.

Prevention is better then cure

It's always prudent to check before you invest in a company fixed deposits. Credit rating agencies accord a credit rating based on the fundamentals of a company, which would tell you whether the company is financially sound and is able to honour its commitments.

For example, if credit rating agency CRISIL has accorded AAA for a company fixed deposit means this rating is considered to have the highest degree of safety regarding timely servicing of financial obligations. Such instruments carry lowest credit risk.

Similarly, if there is a AA rating it indicates high degree of safety regarding timely servicing of financial obligations. Such instruments carry very low credit risk.

Apart from checking the best way would be to avoid be carried away with the high interest rates. The possible interest rate differential between a bank fixed deposit and a bad company fixed deposit could be as high as 4 per cent. So, do not get carried away with these rates.

Lastly, where possible it would be prudent to check from existing deposit holders and also brokers as regards a particular companies track record in servicing its fixed deposit obligations.

All in all, before investing in company fixed deposit, it's best to "look before you leap".

GoodReturns.in

Read more about: fixed deposits
Story first published: Friday, June 28, 2013, 8:51 [IST]
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