Skip to main content

How to find winners in company fixed deposits?

Talk about interest rates going up has picked up pace after the Reserve Bank of India (RBI) raised key policy rates last week. For most of us, it is almost a non-event — unless you have a floating rate housing loan — as a quarter percentage increase in fixed deposits (FDs) does not make many people rush to the dance floor.

However, there is another large group, which keenly follows the trends in interest rates — people whose idea about investing and savings end with bank FDs and company FDs. Due to spiralling living expenses, this class of investors has started taking a hard look at company deposits lately, say financial advisors. Company FDs have seen a renewed interest and higher flows from investors in the past one month, they say.

 

Investors preferring company FDs

 

 

To start with, inflation is in the double-digit territory and bank FDs are, at best, fetching merely 7-8% interest per annum. So, the real return from bank deposits is negative, which has led to lot of people making a beeline for company FDs that offer a slightly higher return than bank FDs.

Secondly, over the past one-and-a-half year, the Sensex has moved from 8000 to 19000 – 20000 range, an unexpected windfall for many investors, making them a bit nervous about the future course of the market in the process. This has prompted some investors to book profits and invest the money in safe and simple products like company FDs. Finally, interest rates have hardened by around 1% over the past one month, which has also attracted new investors to these deposits

 

Company FDs provide higher interest rate

 

Over the last one month, we have seen an increased flow in company fixed deposits due to higher interest rates.

We have seen some equity investors book profits and allocate money to debt products such as company fixed deposits in the recent past. More than half of Indian savings find their way to bank FDs. Investors looking for higher returns mostly end up chasing company FDs.

On an average, an AA-rated company offers around 2% higher return than a bank fixed deposit. Sure, not a reason to call for a party, but even an extra percentage or two count a lot when you are living on interest income — as most retired people do in our country.

 

Beware of dubious players

 

However, the problem with company FDs is the presence of dubious players who enter the market time and again. There are companies, mostly on the verge of shutting down, that enter the market with the promise of extremely higher returns. Often some people tend to overlook the rating assigned to these companies (which are invariably low) and end up being cheated by the company at the time of repayment.

However, that does not mean you should not check the company deposit space. Indeed, you should. But stick to certain rules which you should never break in search of better returns. These rules are simple, but they have stood the test of time.

 

Can you part with the money?

 

Before investing in a company deposit, you should ask yourself whether you can actually part with the money for the term you have chosen for the deposit. This is because, compared with mutual funds or bank FDs, company FDs are not very liquid instruments.

In most cases, premature withdrawal is not allowed before three months. If you wish to withdraw between the third and sixth month, you may not get any interest at all. If you are forced to withdraw the money between six months and a year, you get 3% less than the guaranteed return.

 

 

Does the name ring a bell?

 

Before investing in a company, check with your financial advisor about the credentials of the company. Bluntly put, ask whether the company has ever duped investors in the past. In case of a listed company, you could take a look at the financial results before making an investment decision. But why do this exercise? Sure, you don't do any of these things while putting money in a bank FD. That is because those deposits are covered by a Deposit Insurance and Credit Guarantee Corporation of India guarantee, which assures repayment of Rs 1 lakh in case of a default.

However, company deposits offer no such guarantee and the safety of the FD depends on the company's financial position. That is why you should opt for companies that pay dividends and are profit-making. Another starting point could be the rating enjoyed by the company. Financial experts say investors should go only for triple-A or double-A rated schemes.

 

Know the risk

 

Just like the stock market, the company deposit space is also inhabited by a variety of species. Depending on their reputation, the interest rate offered by them can vary. For example, a veteran player in the market like HDFC will offer you only 7.75% p.a. for a three-year fixed deposit, but a relatively-unknown recent entrant in the deposit market like Ankur Drugs offers 12%, while Asian Electronics offers 10% p.a.

Why do these company FDs offer you higher returns? Because these deposits are a little riskier than the state-sponsored small saving schemes or mutual fund schemes which invest in a debt portfolio. Here, the only factor that could assure you timely payment of interest as well as repayment is the company's financial strength. So, the company with a stronger financial record will pay less and the emaciated ones will be forced to offer a little extra.

 

How much should you invest?

 

Just because some companies offer better interest than banks, you shouldn't rush to invest your entire corpus in company FDs. Never forget the principle of diversification even when it comes to the debt market — never put all your eggs in a single basket.

Based on your risk profile, you could invest up to 10% of your investment in company fixed deposits. He also warns investors against putting the entire money in a single company. It makes sense to diversify by spreading your deposits across a number of companies and industries to reduce risk.

 

Some strategies for you

 

 

Some companies like HDFC also offer you a monthly income plan (MIP) wherein you can draw your interest on a monthly basis to help meet your expenses. They also offer a SIP where you can invest every month instead of a lump sum to build a bigger corpus. Based on your risk profile, you could invest up to 10% of your investment in company fixed deposits.

Investors should not put all your money in a single company. It makes sense to diversify here by spreading your deposit across a number of companies and industries to reduce risk. Unless you need a regular income, you could select from a range of 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.

 

Company Deposits vs Bank FDs

 

High inflation is eating into the real rate of return from FDs, forcing many investors to opt for company deposits

Typically, an AA-rated company offers around 2% higher interest than a bank FD

Always opt for an AA or AAA-rated company, as companies rated below could be risky

However, company deposits are not as safe as bank FDs, as there is not guarantee on capital repayment

Check the past record of the company, as the safety of your money depends on the financial strength of the company

Spread your money across a number of companies to make sure your entire corpus is not affected by a default by any company

Popular posts from this blog

ICICI Prudential Balanced Fund

 ICICI Prudential Balanced Fund scheme seeks to generate long-term capital appreciation and current income by investing in a portfolio that is investing in equities and related securities as well as fixed income and money market securities. The approximate allocation to equity would be in the range of 60-80 per cent with a minimum of 51 per cent, and the approximate debt allocation is 40-49 per cent, with a minimum of 20 per cent. An impressive show in the last couple of years has propelled this fund from a three-star to a four-star rating. The fund has traditionally featured a high equity allocation, hovering at well over 70 per cent, which is higher than the allocations of the peers. But in the last one year, the allocation has been moderated from 78-79 per cent levels to 66-67 per cent of the portfolio. ICICI Prudential Balanced Fund appears to practise some degree of tactical allocation based on market valuations. Within equities, well over two-thirds of the allocation is parked i...

TDS Rate and Personal Account Number(PAN)

    The TDS rate doubles to 20% from 10% if you fail to mention your Personal Account Number   IF you run a glance through your pay slip, you will come across something called TDS, which is tax deduction at source. In most cases, the employer deducts this amount at the time of payment of salary itself and pays the total tax amount to the government on behalf of all the employees. If you are a self- employed or practicing professional s, you have to pay this amount yourself.    Tax deducted at source is one of the modes of income tax collection by the government. Under the income-tax laws, income tax at specified rates is required to be deducted while making certain payments.    The rate of deduction of tax at source on interest and rent payment is 10%. For salary payments, the employers deduct income tax at source on a monthly basis after computing income tax liability on estimated annual taxable income of the employee. Tax benefits on housing loan, investments, etc are consid...

Tax Planning: Income tax and Section 80C

In order to encourage savings, the government gives tax breaks on certain financial products under Section 80C of the Income Tax Act. Investments made under such schemes are referred to as 80C investments. Under this section, you can invest a maximum of Rs l lakh and if you are in the highest tax bracket of 30%, you save a tax of Rs 30,000. The various investment options under this section include:   Provident Fund (PF) & Voluntary Provident Fund (VPF) Provident Fund is deducted directly from your salary by your employer. The deducted amount goes into a retirement account along with your employer's contribution. While employer's contribution is exempt from tax, your contribution (i.e., employee's contribution) is counted towards section 80C investments. You can also contribute additional amount through voluntary contributions (VPF). The current rate of interest is 8.5% per annum and interest earned is tax-free. Public Provident Fund (PPF) An account can be opened wi...

Fortis Mutual Fund

Fortis Mutual Fund, a relatively new player, it is still to prove its case and define its position in the industry. In September 2004, it came onto the scene with a bang - three debt schemes, one MIP and one diversified equity scheme. And investors flocked to it. Going by the standards at that time, it had a great start in terms of garnering money. Mopping up over Rs 2,000 crore in five schemes was not bad at all. The fund house has not been too successful in the equity arena, in terms of assets. Though it has seven equity schemes, it is debt and cash funds that corner the major portion of the assets. Most of the schemes are pretty new, and the two that have been around for a while have a 3-star rating each. The last two were Fortis Sustainable Development (April 2007), which received a rather poor response, and Fortis China India (October 2007). Fortis Flexi Debt has been one of the better performing funds, after a dismal performance in 2005. It currently has a 5-star rating. None ...

Birla Sun life Fixed Term Plan Series roll over

  The fund house has also decided to roll over the maturity date of Birla Sun life Fixed Term Plan Series LO for 773 days. The scheme shall now mature on July 20, 2017 against the previous June 08, 2015. Best Tax Saver Mutual Funds or ELSS Mutual Funds for 2015 1. ICICI Prudential Tax Plan 2. Reliance Tax Saver (ELSS) Fund 3. HDFC TaxSaver 4. DSP BlackRock Tax Saver Fund 5. Religare Tax Plan 6. Franklin India TaxShield 7. Canara Robeco Equity Tax Saver 8. IDFC Tax Advantage (ELSS) Fund 9. Axis Tax Saver Fund 10. BNP Paribas Long Term Equity Fund You can invest Rs 1,50,000 and Save Tax under Section 80C by investing in Mutual Funds Invest in Tax Saver Mutual Funds Online - Invest Online Download Application Forms For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call --------------------------------------------- Leave your comment with mail ID and we will answer them OR You can write to us at PrajnaCapital [at] Gmail [dot] Com OR Leave a ...
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