However, investment specialists advise caution. They say investors ought to first understand the risks involved in investing funds in a company deposit before signing the cheque.

WHY THE RATES ARE HIGH

One can understand the compulsions of FD customers, thought about conservative & risk averse but looking to earn a few percentages additional when the inflation is eating in to their purchasing power.

"Do not blindly get in to a company deposit because it offers higher rates of interest. Be definite that it meets your needs," says K Ramalingam, founder & director, Holistic Investment Planners.

However, the query you require to ask is why is the company paying you the additional returns.

Take a glance at the fixed income space - the investment avenue for conservative investors. Bank FDs offer 8% to 9% at the moment. Fixed maturity designs (FMPs) from mutual funds, which are  similar to FDs, offer about 9% to 10%.

What explains such a massive difference between rates? The answer is simple: the company offering you the higher returns is rewarding you for the additional risk you are taking.

Then you have reputed companies like Godrej Industries offering you a mere 8% or so per annum on their FDs. & HDFC , which offer 9.75% for a 33-month deposit. On the other finish of the spectrum, you have companies offering as much as 12% for a three-year deposit.

Risk? Yes, these deposits are a tiny more dicy than a bank FD or mutual fund schemes investing in a debt portfolio because you have nothing but the financial strength & goodwill of the company to assure you timely payment of interest as well as the repayment of capital.

In short, the company with strong financials will pay less & the weaker ones would be forced to offer a tiny more to compensate you for the additional risk you are taking. Don't ignore this crucial aspect in your hot pursuit for higher returns.

"Many a time, even reputed companies face temporary money flow issues &, hence, raise fixed deposits," says K Ramalingam. A case in point is of Tata Motors , which offered fixed deposits in early 2009, at rates of 11% per annum, which was thought about high at that point of time.

LOOK FOR THE RED FLAG

However, as an investor, you require to be a bit cautious if a company is offering fixed deposit interest rates much higher than the rates prevailing in the market.

"A nice thumb rule is the 3% rule. If the company offers 3% over the traditional bank rate, then ought to be cautious of it," says Srikanth Meenakshi, founder, fundsindia.com.

There's been instances historicallyin the past where companies have entered the market, promised high returns to investors & then disappeared. While several investors lost their investments in CRB Capital Markets , companies like Morepen Laboratories ended up giving equity shares to investors holding fixed deposits.

Keep in mind that while bank deposits are covered by a guarantee from the Deposit Insurance & Credit Guarantee Corporation of India, which assures repayment of .`1 lakh in case of default, company deposits offer no such guarantee.

CHECK THE CREDENTIALS

The safety of the fixed deposit depends on the financial position of the company. That is why you ought to be cautious while selecting company fixed deposits.

Before investing in a company fixed deposit, do your due diligence. Find out from your financial advisor or distributor about the past credentials of the company, its promoters & their past record. Check whether the company has been prompt in dispatching interest warrants & repayment proceeds.

Source: [ET]