Precautions to be followed when investing in company FDs

Many people find company deposits lucrative due to the higher rate they pay on the FDs as compared to bank FDs. However this high return also comes with high risk. The major risk in case of a company FD is that if the company is unable to repay your money, you end up losing it. But in case of banks, your money is safe as the bank FDs are insured up to Rs. 1 lakh. So in case the bank becomes insolvent, you are sure to get your money back.

So how do you protect yourself when investing in company FDs? For one, opt for bank FDs having a credit rating of at least A+. These ratings are given by rating agencies like ICRA and CRISIL. A+ ratings implies the FD is safe.

Find out the company’s record in making repayment on time. Check the company promoters’ record. E.g. it is always better to opt for FDs from companies like Tata and L&T. Stay away from companies with unknown promoters, even though they may be offering higher rate of interest.

Follow these tips to ensure your money in company FD is safe.

How Safe is Your Bank’s Fixed Deposit?

“Bank Fixed Deposits (FDs) are the safest investment option.” This is a common refrain we hear from our parents, friends and financial advisors. But is it really true? Are bank FDs really as safe as they are made out to be?

The answer – No. While FDs don’t face the volatility risk, unlike stocks, they do have inflation risk and liquidity risk. Let us se what each of these risks entails.

Inflation risk: Inflation is the increase in cost of living. Higher rate of inflation erodes the value of your money, as you need more money to buy the same quantity of items.  Normally the interest rates offered by the banks are lesser than the rate of inflation. E.g. the current rate on bank FDs is around 7-8%. But the current inflation rate is over 10%. So the returns from the FDs are not enough to cover the inflation, thus eroding the value of your investment.

Liquidity risk: FDs up to Rs 1 lakh are insured by Deposit Insurance and Credit Guarantee Corporation. Any amount over this limit is not insured. So if the bank sinks, you end up losing the balance amount. As many people tend to deposit their money in smaller banks, which are at the risk of crashing, they face a higher risk of losing their money.

While these are two major risks, there are other drawbacks like tax and higher lock-in period. You need to understand these risks before you opt for bank FDs. Also ensure you invest in these deposits for short-term as the rates are highest during that period.

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