Skip to main content

Company FDs - High Returns & High Risks


   Traditional devotees of fixed deposits (FDs) are taking a hard look at company deposits these days. For obvious reasons, though. Consider this: the State bank of India (SBI) is offering 9.25% on a three-year fixed deposit, while companies like Unitech, Plethico Pharma, Kolte Patil Developers, among others, are offering 12% per year on their FDs with similar terms.


However, investment experts advise caution. They say investors should first understand the risks involved in investing money in a company deposit before signing the cheque.


Do not blindly get in to a company deposit just because it offers higher interest rates. Be sure that it meets your needs.

Why The Rates Are High?

One can understand the compulsions of FD customers, considered conservative and risk averse but looking to earn a few percentages extra when the inflation is eating into their purchasing power.


However, the question you need to ask is why is the company paying you the extra returns.


Take a look at the fixed income space — the investment avenue for conservative investors. Bank FDs offer 8% to 9% at the moment. Fixed maturity plans (FMPs) from mutual funds, which are almost similar to FDs, offer about 9% to 10%. Then you have reputed companies like Godrej Industries offering you a mere 8% or so per annum on their FDs. And HDFC, which offer 9.75% for a 33-month deposit. On the other end of the spectrum, you have companies offering as much as 12% for a three-year deposit.


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


Risk? Yes, these deposits are a little more risky than a bank FD or mutual fund schemes investing in a debt portfolio because you have nothing but the financial strength and 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 and the weaker ones would be forced to offer a little more to compensate you for the extra risk you are taking. Don't ignore this crucial aspect in your hot pursuit for higher returns.

Risks:

Many a time, even reputed companies face temporary cash flow problems and, hence, raise fixed deposits. A case in point is of Tata Motors, which offered fixed deposits in early 2009, at rates of 11% per annum, which was considered high at that point of time.


However, as an investor, you need to be a bit wary if a company is offering interest rates much higher than the rates prevailing in the market.
A good thumb rule is the 3% rule. If the company offers 3% more than the standard bank rate, then one should be wary of it


There have been instances in the past where companies have entered the market, promised high returns to investors and then just 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.


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


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

Check The Credentials:

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 and their past record. Check whether the company has been prompt in dispatching interest warrants and repayment proceeds.


In case of a listed company, you could take a look at its financial results before making an investment decision. If the company has been reporting profits and has a continuous dividend paying track record, your money is likely to be safe.
That is why experts consider companies like HDFC, Mahindra Finance or LIC Housing safe for fixed deposit investors.


You can also look at the ratings given for the deposits. Financial experts say investors should go only for AAA- or AA-rated schemes. Avoid sectors like real estate, where there is too much adverse noise around currently.

The Tax Angle:

Remember that interest income from company deposits is taxable. So, for those in the high interest bracket, the post-tax returns may not be that lucrative. However, for retired individuals or those in the 10% tax bracket, the returns could be very attractive. Financial planners recommend diversification and sticking to the asset allocation plan even while investing in company deposits.

Company deposits need to be spread over a large number of companies and in different industries. This way, you can diversify your risk.


Depending on your risk profile and asset allocation plan, you can invest up to 10% of your fixed income portfolio in company fixed deposits.


If your fixed income portfolio, for example, is worth . 20 lakh, then . 2 lakh could find its way into company deposits. Here, too, you can spread it across deposits of 4-5 companies.


And if you are retired and unwilling to take any risk, your money should be put in AAA- or AA-rated companies. It would not be worthwhile taking risk for the extra 1% to 2% from unrated companies. Ignore all the unrated companies and choose companies with the ratings of AA or higher.


Unless you need income regularly, you can opt for the cumulative schemes to regular income options since the interest earned automatically gets reinvested at the same coupon rate, giving you higher yields in the process.

 

Popular posts from this blog

Am you Required to E-file Tax Return?

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300   Am I Required to 'E-file' My Return? Yes, under the law you are required to e-file your return if your income for the year is Rs. 500,000 or more. Even if you are not required to e-file your return, it is advisable to do so for the following benefits: i) E-filing is environment friendly. ii) E-filing ensures certain validations before the return is filed. Therefore, e-returns are more accurate than the paper returns. iii) E-returns are processed faster than the paper returns. iv) E-filing can be done from the comfort of home/office and you do not have to stand in queue to e-file. v) E-returns can be accessed anytime from the tax department's e-filing portal. For further information contact Prajna Capit...

Mutual Fund Review: HDFC Index Sensex Plus

  In terms of size, HDFC Index Sensex Plus may be one of the smallest offerings from the HDFC stable. But that has not dampened its show, which has beaten the Sensex by a mile in overall returns   HDFC Index Sensex Plus is a passively managed diversified equity scheme with Sensex as its benchmark index. The fund also invests a small proportion of its equity portfolio in non-Sensex scrips. The scheme cannot boast of an impressive size and is one of the smallest in the HDFC basket with assets under management (AUM) of less than 60 crore. PERFORMANCE: Being passively managed and portfolio aligned to that of the benchmark, the performance of the index fund is expected to follow that of the benchmark and in this respect, it has not disappointed investors. Since its launch in July 2002, the fund has outperformed Sensex in overall returns by good margins.    While every 1,000 invested in HDFC Index Sensex Plus in July 2002 is worth 6,130 now, a similar amount invested in Sensex then wo...

IDFC - Long term infrastructure bonds - Tranche 2

IDFC - Long term infrastructure bonds What are infrastructure bonds? In 2010, the government introduced a new section 80CCF under the Income Tax Act, 1961 (" Income Tax Act ") to provide for income tax deductions for subscription to long-term infrastructure bonds and pursuant to that the Central Board of Direct Taxes passed Notification No. 48/2010/F.No.149/84/2010-SO(TPL) dated July 9, 2010. These long term infrastructure bonds offer an additional window of tax deduction of investments up to Rs. 20,000 for the financial year 2010-11. This deduction is over and above the Rs 1 lakh deduction available under sections 80C, 80CCC and 80CCD read with section 80CCE of the Income Tax Act. Infrastructure bonds help in intermediating the retail investor's savings into infrastructure sector directly. Long term infrastructure Bonds by IDFC IDFC issued an earlier tranche of these long term infrastructure bonds on November 12, 2010. This is the second public issue of long-te...

National Savings Certificate

National Savings Certificate Here's everything you need to know about the 5-year savings scheme offered by the Government This is a 5-year small savings scheme of the government. From 1 July 2016, a National Savings Certificate (NSC) can be held in the electronic mode too. Physical pre-printed NSC certificates have been discontinued and replaced with Public Provident Fund-like passbooks. What's on offer The minimum amount you can invest in them is Rs100 and there is no upper limit. Under this scheme, all deposits up to Rs1.5 lakh qualify for deduction under section 80C of the Income-tax Act, 1961. The interest earned is taxable. You can invest in multiples of Rs 100. These certificates can be owned individually, jointly and also on behalf of minors. The interest rates for all small savings schemes are released on a quarterly basis. The effective rate for NSC from 1 October to 31 December is 8%. The interest is calculated on an annual compounding basis and is given along w...

Different types of Mutual Funds

You may not be comfortable investing in the stock market. It might not seem like your cup of tea. But you can start by investing in Mutual Funds. Many first-time investors invest in Mutual Funds. This is because they do not know how to invest in individual securities. Basic information on Mutual Funds People invest their money in stocks, bonds, and other securities through Mutual Funds. Each Fund has different schemes with specific objectives. Professional Fund Managers look after these schemes. Your Fund Manager could help you invest in a scheme that suits your financial goal. Functioning of Mutual Funds You could make money through Mutual Funds in different ways. A single Mutual Fund could hold many different stocks, bonds, and debentures. This minimizes the risk by spreading out your investment. You could earn dividends from stocks and interest from bonds. You could also earn capital by selling securities when their price increases. Usually, you could choose to sell your share any t...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now