Fixed income products forms the base of a financial plan. If the base is not strong whatever we build upon it is under risk of collapse, therefore by allocating a higher quanta of funds towards fixed income products improves the overall stability of a portfolio.
Company Fixed Deposits
Fixed Deposits in companies that earn a fixed rate of return over a period of time are called Company Fixed Deposits. Financial institutions and Non-Banking Finance Companies (NBFCs) also accept such deposits. Deposits thus mobilized are governed by the Companies Act under Section 58A. These deposits are unsecured, i.e., if the company defaults, the investor cannot sell the documents to recover his capital, thus making them a risky investment option.
Benefits of investing in Company Fixed Deposits
- High interest.
- Short-term deposits.
- Lock-in period is only 6 months.
- No Income Tax is deducted at source if the interest income is up to Rs 5,000 in one financial year
- Investment can be spread in more than one company, so that interest from one company does not exceed Rs. 5,000
Like most investment option, Company Fixed Deposits are a mixed bag. Company FDs can be an interesting investment option if you know how to select the right FD, and how to avoid the no-so-good ones. Here are some of the points that investors should keep in mind.
Spread your Risk
The deposits should be spread over a large number of companies engaged in different industries. This way, you’ll be able to diversify your risk among various industries/companies. Try not to put more than 10% of your total investments in one particular company.
Choose the Right Period of Deposit
Ideally, the investment should be for 1 to 3 years depending upon the rate of interest.
The performance of the companies should be reviewed at maturity. This will help you decide whether to renew or reshuffle the deposit. It is also wise to keep a track of these companies by checking their share prices, annual reports and other details reported in newspapers.
Bond refers to a security issued by a company, financial institution or government which offers regular or fixed payment of interest in return for borrowed money for a certain period of time.
By purchasing a bond, an investor loans money for a fixed period of time at a predetermined interest rate. While the interest is paid to the bond holder at regular intervals, the principal amount is repaid at a later date, known as the maturity date. While both bonds and stocks are securities, the principle difference between the two is that bond holders are lenders, while stockholders are the owners of the organization. Another difference is that bonds usually have a defined term, or maturity, after which the bond is redeemed, whereas stocks may be outstanding indefinitely. An exception is a consol bond, which is a perpetuity (i.e., bond with no maturity).
Thus a bond is like a loan: the issuer is the borrower (debtor), the holder is the lender (creditor), and the coupon is the interest. Bonds provide the borrower with external funds to finance long-term investments, or, in the case of government bonds, to finance current expenditure. Certificates of deposit (CDs) or commercial paper are considered to be money market instruments and not bonds. Bonds must be repaid at fixed intervals over a period of time.