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 .
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.
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.
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.
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.
New Section Introduced in Income Tax Act 2011: Section 80CCF was introduced in the Income Tax Act, 1961 in the budget of February 2010. As per this section investments made in notified infrastructure bonds are exempt from tax up to maximum of Rs 20,000 per year. Section 80CCF allows individuals to invest Rs. 20,000 in infrastructure bonds, and reduce this amount from taxable income. This exemption is in addition to the Rs. 100,000 deduction under section 80C (Investment in instruments like ELSS Mutual Funds, Life Insurance, Provident Fund etc).
Pros : The limit of Rs 20,000 per annum is in addition to Sections 80C, 80CCC and 80CCD. Hence, it is advisable to consider applying in this issue.
Cons : The bonds are locked in for five years, so there is no exit in case you need the money midway which restricts liquidity.