Deciding on which company FD to invest in

Most of the large companies solicit fixed deposits from the general public.These FDs carry interest rates that are usually higher than FDs of the public and private sector banks and, therefore, company FDs attract a large number of investors.

But it must be remembered that an offer of high interest rate could accompany high risk. It could be a risk-return trade-off, where higher the return could mean higher the risk to capital. So, one needs to tread with caution before deciding on which company to invest and which ones to avoid. Here are some crucial pointers to make an informed decision:

Company’s Financial Status: The company FDs are unsecured, so there is a chance of default in payment of interest, or worse, repayment of the principal amount, if the company gets into financial trouble. So, it is absolutely necessary that you check the financial status of the company before investing in its FDs. If the company is doing well financially, it would be safe to invest in such a company even if it offers comparatively lower rate of interest than other companies.However, if the company’s business isdeclining and if it is showing signs of financial stress, it would be better to avoid investing such a company even if it is offering higher rate of interest.

Company Background: If the company is well-established and reputed and has been in the business for a long time, it will always strive to maintain its reputation by meeting its financial commitments. Check the background of the promoters and the other nominees on the company’s board of directors. If the board comprises of well-known personalities, it would be safe to invest in such a company. If the reputation of the promoters is dubious and other directors on the board do not inspire confidence, it is betterto avoid investing in the company.

FD Rating: Rating agencies such as CRISIL, ICRA and CARE rate the FD schemes of companies. A company offering FDs with rating of ‘AAA’ (triple A) can be deemed to be safe and one can invest for the long term in such FDs. However, if the rating is lower than triple A, then one can invest for the short term. However, if the rating is low (negative), one should avoid investing in FDs of such a company.