Some firms promise as high as 13%, experts advise caution "FOR firms, raising funds through debt becomes a cheaper source of capital. The credit rating of these firms should be reviewed " Himanshu Kohli CEO, Client Associates Private Wealth Management
IF you are looking to invest in a fixed-income instrument, there are more products other than bank fixed deposits that are attractive.
A growing number of private companies are coming up with fixed deposits schemes that promise a return as high as even 13 per cent, which is double the present bank deposit rate.
However, advisers say that investors need to be very cautious because high returns may come with higher risks, as compared with placing money in bank term deposits.
Some of the well-known companies that are at present offering fixed deposits with returns in excess of 10 per cent with different time horizons include JP Associates, Shriram Pistons, J P Associates, Unitech and Ansal Housing.
The largest public sector bank, State Bank of India (SBI) is offering a 6 per cent rate of interest for a one-year deposit. Other private banks such as ICICI Bank and HDFC Bank are offering an interest rate of 6.5 per cent. For a threeyear deposit, SBI pays 6.5 per cent, while both ICICI Bank and HDFC Bank offer 7 per cent over that period.
"I think investors can look forward to cash in on these instruments if they get proper service from these companies. It is a perpetual instrument, therefore, if an organisation can service their clients well, renewals can also possible, and for the company it is one of the cheaper sources for raising funds," said DR Dogra, chief executive officer and managing director, CARE, a credit rating agency.
Investment advisers, however, say that recommending corporate fixed deposits may give higher returns than a bank fixed deposit but these investments can be slightly risky.
Bank deposits, in comparison are zero-risk in nature.
These (company fixed deposits) are unsecured instruments, which mean if the company defaults, the investor cannot sell the documents to recover his capital, thus making them a risky investment option. Those who want to take advantage of the returns should understand the risk associated with it.
"Although some companies are offering reasonably good returns, the risk involved is higher than bank deposits. For companies, raising funds through debt becomes a cheaper source of building capital. The credit rating and the profile of these companies should be reviewed before one puts his money into these schemes.