Corporate fixed deposits (FDs) have gained a fancy among investors because of high fixed returns that these products offer. Typically a corporate fixed deposit offers much higher return than a bank FD, Financial institutions and Non-Banking Finance Companies (NBFCs) also accept such deposits. Deposits thus mobilised are governed by the Companies Act under Section 58A along with Companies (Acceptance of Deposit) Rules 1975
Here we have listed some of the key parameters to review the corporate fixed deposit before making your investment.
1. The issuer company should have a strong goodwill and track record in the market and should be running its business from at least 15- 20 years.
2. Only invest in FDs of companies have been earning profit and have a continuous dividend paying track record of at least last 5 consecutive years.
3. Credit rating is one of the important parameters while selecting corporate fixed deposit. The NBFCs that offer corporate fixed deposit has to get themselves rated by the rating agencies such as CARE, CRISIL, ICRA etc., but manufacturing firms have no such compulsion. A better the rating of the FD, the safer it is to invest as the risk of default is the lowest. While a low rated FD will be risky, however the company will offset the risk by offering a higher yield to the investors.As a thumb rule, investors should invest only in a company having AAA or AA rating. However fixed deposits or certain companies are not rated, in such cases one should deeply study financial statements of the company before making the investment in their FDs. If you are not able to understand financial statement then you can take help of financial advisor or avoid investment in unrated companies.
4. The sector outlook in which company runs its business should be positive. Avoid troubled or high risk sectors like real estate or microfinance.
5. One should avoid company which is offering unusually high interest rates because generally companies offer higher interest rate to compensate high risk.