Company fixed deposits: Time to be cautious as defaults rise

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Company fixed deposits: Time to be cautious as defaults rise
Company fixed deposits, unlike bank fixed deposits are highly unsafe and not secured against any assets of the company. Thus, in the event of a company going bankrupt, brace yourself for losing accumulated principal and the interest amount.

The Outlook in its recent edition has highlighted how individuals have lost money in fixed deposits of at least three companies, one of them promoted by a top-notch industrialist. Earlier this year, the Economic Times reported that lenders had filed a suit against Birla Power for deposit defaults.

Each time we at recommend a company fixed deposit, we do ensure that we make a mention of company fixed deposits being insecure. Of course, existing fixed deposits like the ones from HDFC, PNB Housing, Kerala Transport Development are extremely safe.

Why are investors so gullible?

In the past we have had so many Ponzi schemes going bust, including plantation and the more recently Saradha Group scheme. Yet, we fail to learn from other investors mistake and get lured by that 2 to 3 per cent extra. Now, is the 2 and 3 per cent extra worth the risk. Let's see with an example.

Let's assume you deposit Rs 1 lakh with a financially vulnerable company at 12% for 1 year. If you were to put this in a bank deposit you would possibly get the prevailing interest rate of 9.5%.

Now, you would earn Rs 2,500 extra after one full year over and above what would you would earn from a bank deposit. However, if the company defaults, you could also lose the Rs 1 lakh along with accumulated interest. Just imagine the risk for the Rs 2,500 extra would be Rs 1,12,500 (principal + interest). You would safely get Rs 1,9,500 from your bank FD.

Once again, one needs to highlight the fact that not all fixed deposits need to be painted with the same brush.

For example, we currently have the fixed deposits of Kerala Road Transport, which offers an interest rate higher then that of banks. It is a Government of Kerala undertaking and hence the chances of defaults are negligible. Similar, is the case with PNB Housing, which is a subsidiary of government owned Punjab National Bank. Check some deposit ideas here

Clearly, if you are looking at company deposits for that slight extra over bank deposits, you need to do a little research. In the meantime, its best to avoid the suspect companies, even if your broker is recommending the same.

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