Investors can open fixed deposits with different entities. Banks, financial institutions and companies are usually the bodies investors approach for opening fixed deposits.
When it comes to company fixed deposits, most financial planners’ advice is to make the deposit for a short time-period, i.e. one or two years, and not extend it further.
Let’s take a look into the reasons behind this suggestion and how investors can reduce the risk elements by adopting such a strategy.
Choosing duration
At the time of opening a fixed deposit (FD) with the company, investors will have to choose its time-period or duration. The usual choice is one, two or three years.
By opting for a shorter time-period, investors can accommodate reservations they might have with respect to the risk elements present in the company.
There is a clear relation between the risks in an investment and the returns offered on the deposit. So a higher interest rate will mean the risk element too is high.
While some investors might want to take the risk, they might not want to expose it for a long time period.
Financial details
Opting for a shorter time frame also gives investors the chance to react to changing news flows.
At the time of making the deposit, the company might be under some stress and offer slightly higher rates. More financial details of the company will come out as time progresses.
If the conditions are deteriorating or not improving, opting for a shorter time-period enables investors to actually get back the money and prevent higher exposure to the company.
However, if things are working out for the better, the investors always have the option of continuing with the investment by increasing the time-period of the deposit as and when it matures.
In this way, the investors can always keep an eye on the developing situations and then react to them in the appropriate manner.
No risk elimination
In this entire process of choosing a certain time-period for their investments, there is one thing the investors should never forget.
They are not eliminating the risks present in company fixed deposits, which are higher than those present in bank fixed deposits even though both have the same terms of FDs.
Even if they put in money for a very short span of time, say one year, and things go wrong with the company’s finances, recovering the money might become difficult.
The company might postpone the payment of the interest and the repayment of the capital, as a result of which the investor could become a victim of the worsening financial situation of the firm.
When it comes to company fixed deposits, most financial planners’ advice is to make the deposit for a short time-period, i.e. one or two years, and not extend it further.
Let’s take a look into the reasons behind this suggestion and how investors can reduce the risk elements by adopting such a strategy.
Choosing duration
At the time of opening a fixed deposit (FD) with the company, investors will have to choose its time-period or duration. The usual choice is one, two or three years.
By opting for a shorter time-period, investors can accommodate reservations they might have with respect to the risk elements present in the company.
There is a clear relation between the risks in an investment and the returns offered on the deposit. So a higher interest rate will mean the risk element too is high.
While some investors might want to take the risk, they might not want to expose it for a long time period.
Financial details
Opting for a shorter time frame also gives investors the chance to react to changing news flows.
At the time of making the deposit, the company might be under some stress and offer slightly higher rates. More financial details of the company will come out as time progresses.
If the conditions are deteriorating or not improving, opting for a shorter time-period enables investors to actually get back the money and prevent higher exposure to the company.
However, if things are working out for the better, the investors always have the option of continuing with the investment by increasing the time-period of the deposit as and when it matures.
In this way, the investors can always keep an eye on the developing situations and then react to them in the appropriate manner.
No risk elimination
In this entire process of choosing a certain time-period for their investments, there is one thing the investors should never forget.
They are not eliminating the risks present in company fixed deposits, which are higher than those present in bank fixed deposits even though both have the same terms of FDs.
Even if they put in money for a very short span of time, say one year, and things go wrong with the company’s finances, recovering the money might become difficult.
The company might postpone the payment of the interest and the repayment of the capital, as a result of which the investor could become a victim of the worsening financial situation of the firm.