Fixed Deposits & Fixed Maturity Plans (FMPs)

Fixed deposits in companies that earn a fixed rate of return over a period of time are called Company/Corporate 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 company to recover his capital, thus making them a risky investment option.

Benefits Of Investing In Company Fixed Deposits:

1. High Interest.
2. Short term deposits.
3. Lock-in period only 6 months.
4. No income tax is deducted at source if the interest income is upto Rs 5000/-in one financial year
5. Investment can be spread in more than one company, so that interest from one company
does not exceed Rs. 5000.

9. How To Choose A Company?

There are many companies operating in Company Deposit market. Investors, however, have to be careful while selecting a company for investing their hard earned money. Following is a checklist for selecting good companies:

Credit Rating/ Reputation and Size of Industrial Group:

The first thing to check out is the rating of the deposit scheme. Investors should avoid those companies, which have below 'A' rating. In case of manufacturing companies, it's however not mandatory to get rating. In this case investor should look at the background of promoters and financial track record. In manufacturing companies, reputation and size of industrial group to which the company belongs is the key criteria for safety and reliability.

Don't put all your eggs in one Basket:

The deposits should be spread over a large number of companies engaged in different industries. In this way an investor will be able to diversify his risk among various Industries/Companies. Investors should not put more than 10% of their total portfolio in one particular company.


Fixed Deposits vs FIxed Maturiy Plans
The major difference between the two is in the post tax returns. For instance, interest on Bank FDs is fully taxable and gets taxed at the highest rate at which the assessee pays tax whereas the return from FMPs is either subject to the dividend distribution tax (for the dividend option) or the capital gains tax rate (for the growth option). The distribution tax rate is 14.16 per cent and the capital gains tax rate is 10 per cent (or 20 per cent with indexation).

These taxation rates are lower than the income tax rate applicable on fixed deposits, especially in the case of investors in the higher tax bracket.

Tax directly eats into returns, which is why FMPs have an edge over bank fixed deposits, especially in the longer tenure when indexation benefit is allowed in FMPs.