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Keep risk factor in mind for company FDs

business Updated: Oct 06, 2008 21:19 IST
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Company fixed deposits are again making their presence felt as various companies find the need to raise funds from investors. While at first sight some of these investments might seem to provide very high rates of interest, people should take necessary steps to understand the entire process.

Understanding the risk reward process is vital in ensuring right decision with respect to the entire investment. This is essential because the area is a slightly risky and needs to be scrutinised well.

Nature of deposits
Company fixed deposits are the deposits offered by companies for specific time period, usually one, two and three years in the Indian market. This becomes a way to raise funds because other routes might not be available for companies to raise money.

There are various ways in which the companies will raise the deposits. Some advertise, asking investors to apply for the deposits. Others ask only their existing deposit holders to renew their deposits and do not take amounts from other investors, while some others use the broker network to push deposits.

Higher risk and rates
One of the most important factors of the company fixed deposits is that the return being offered will directly match the risk involved in investing in such an insturment.

So in this case, if there is a higher rate being offered then the investor must first question the reason why such deposits are being offered at these high rates. Usually this is because other borrowers are not offering finance at a lower rate that is forcing them to offer such high rates.

There is a risk here that if the company faces deterioration in performance, then the interest payment as well as the capital repayment can be delayed as has been witnessed in the past. Keeping this in mind, the investor has to make their decisions.

Minimum amount
Another factor that is also witnessed in several cases is that the company is asking for a minimum amount of deposit. This minimum deposit limit can in some cases be as high as Rs 1 lakh. This changes the entire nature of the investment because in this case only a person having such large amount of funds will be able to make use of the opportunity.

In most other cases the starting point for the deposits start at Rs 10,000 and this makes the investment more affordable for a wider section of the investors.