Company deposits undeniably offer you superior returns as compared to bank deposits in India. This interest rate can be higher by almost one per cent, which is why many individuals are lured by company deposits.
But, unlike bank deposits these are not very secure and you could lose your interest and principal amount.
Since company deposits are unsecure deposits we tell you when you should not invest in a company fixed deposit. Here they go.
1) Companies fixed deposits that have a poor credit rating
Credit rating agencies like Crisil, ICRA and CARE Ratings do a thorough rating of companies before they assign a rating. For example, they study the balance sheet, industry trends etc., and arrive at a credit rating. Generally a "AAA" credit rating by these agencies means the company's ability to pay your interest and principal amount is very strong.
Some of the company deposits that have a "AAA rating" currently include the likes of Mahindra Finance, Bajaj Finserv etc.
Companies with a rating of "A" and under are highly risky and you could even lose your capital. So, it's best to avoid such companies.
Read on 7 AAA rated companies deposits here
2) Companies not paying regular dividends
Weak financials of a company means it may not be able to pay you interest and your principal amount. One way to check the strong credentials of a company would be to assess its dividend paying track record.
Hefty dividends for many years means the company is relatively strong. If a company is not paying regular dividends that means its cash flows are weak. Avoid the fixed deposits of such companies.
3) Companies that are making losses
This need not even be elaborated upon. Companies with losses are unlikely to service your principal and interest amount. It's best that these companies be avoided.
4) Companies fixed deposits that offer high interest rates
If banks are offering an interest rate of around 9 per cent and if a company is offering an interest rate of 15 per cent, it may be time to get a little suspicious.
Why would a company want to offer such an extraordinarily high interest rate?. It's best to avoid such companies. A per cent or two above bank interest rates is reasonable.
We reiterate once again that company FDs are highly risky when compared to bank deposits. Do a thorough checklist of the above things and if they satisfy most of these, there may be very little chance of a default. It's best to go for solid AAA rated fixed deposits from companies.