The term "fixed" in fixed deposits denotes the period of maturity or tenor. Fixed Deposits, therefore, presupposes a certain length of time for which the depositor decides to keep the money with the bank and the rate of interest payable to the depositor is decided by this tenor. The rate of interest differs from bank to bank and is generally higher for private sector and foreign banks. This, however, does not mean that the depositor loses all his rights over the money for the duration of the tenor decided. The deposits can be withdrawn before the period is over. However, the amount of interest payable to the depositor, in such cases goes down (usually 1% to 2% less than the original rate). Moreover, as per RBI regulations there will be no interest paid for any premature withdrawals for the period 15 days to 29 or 15 to 45 days as the case may be.  

Other than banks, there are non-banking financial companies and companies who float schemes from time to time for garnereing deposits from the public. In the recent past, however, many such schemes have gone bust and it is very essential to look out for danger signals before putting all your eggs in one basket.

Things To Look Out For

• Credit rating/ reputation of the group
  The rating is posibly the best way to judge the credit worthiness of a company. However, for manufacturing company deposits, it is not mandatory to get a rating. In such cases, it is better to check the size and reputation of the company or the industrial group it belongs to.
• Interest rate
  Within the same safety level (or rating), a higher interest rate is a better option. The difference in some cases can be as high as 1%.
• Diversify
  The portfolio principle applies to company deposits also. It is always better to spread deposits over different companies and industries so as to reduce risk.
• Period of deposit:
  The ideal period for a company deposit is 6 months to one year as it offers the liquidity option. Also, it gives an opportunity to review the company's performance.
• Periodic review of the company:
  As your principal and interest rests in the hand of the company, it is advisable to review the company's performance periodically.

Where Not To Invest?

• Companies which offer very high rates of interest, say 16% or above, when others are offering 12-13%.
• Companies with poor cash flows.
• Avoid unincorporated companies/ private limited companies as it is difficult to judge their performance in absence of information.
• Companies with accumulated losses on their balance sheets.
• Companies with a poor dividend paying record