How much interest Corporate FD’s yield?

April 17, 2012   ·   0 Comments

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Corporate fixed deposits are similar to banking FD’s, except that the money invested is with a company and not a bank. Deposits under corporate FD’s are governed by the Companies Act under Section 58A.

As much as 60% of one’s savings find their way to the bank fixed deposit.  However, with RBI slashing rates by 0.75% means we will see a significant drop in Bank Fixed deposit interest rates. The interest rates will drop from the range of 8% to 9.5 %. What this means for investors is to look for other options for investing. Corporate FD’s is one measure to do so.

Company FD’s are primarily meant for conservative investors who don’t wish to take the risk of vagaries of the stock market. But experts say the due diligence that an investor should undertake is similar to that before buying shares. Getting lured by the high interest rate alone is not advisable.

How to choose a good company deposit scheme?

  1. Ignore the unrated Company Deposit Schemes. Ignore deposit schemes of little known manufacturing companies.  For NBFCs, RBI has made it mandatory to have an ‘A’ rating to be eligible to accept public deposits. One should go further and look at only AA+ or AAA schemes.
  2. Within a given rating grade, choose the company with a better reputation.
  3. Once you decide on a company, choose the schemes that have given a better return.  Unless you need income regularly, you should prefer cumulative schemes to regular income options since the interest earned automatically gets reinvested at the same coupon rate, resulting in better yields. It also gives you a lump-sum amount at one go.
  4. It is better to make shorter deposit of around 1 year to 3 years.  This way, you can not only keep a watch on the company’s rating and servicing, but also have your money back in case of an emergency.
  5. Check on the servicing standards of the company.  You should not invest in companies that care little about investor services, like promptly sending interest warrants or the principal cheque.
  6. Involve your Financial Planner / Investment Advisor for advice in all your transactions.  Do not bypass and invest directly.

 

Do’s and Don’ts of investing in Company Fixed deposits:

Do’s

  • Check On Credit Ratings: A very important indicator. It highlights the underlying risk of the company. AAA rating denotes the highest safety. It indicates the financial health of the company and the ability to service its financial obligations. In simple words, AAA rating indicates that you can trust a particularly rated company with your money and expect it to pay the interest amount due to you. CRISIL and ICRA are India’s leading credit rating and research institutes. They do a detailed research of the company and then rate them.
  • Check on promoter Credibility: Promoters play a substantial role in making or breaking a company. So always do a background check on them. Promoters with dubious or shaky records should be strictly avoided. Doing a background check on promoters is easier said than done so the safer route is to invest in fixed deposits of a blue-chip company.

Don’ts

  • Get lured by High interest rates: Any company offering a very high rate of interest should be a cause for concern. Companies generally offer high rate of interest to make up for the perceived risk attached with their offerings. So again don’t get carried away with high rate of interest as they always come with high risk.  The major risk in case of a company FD is that if the company is unable to repay your money, you end up losing it. But in case of banks, the rules are stricter and your money is safe as the bank FDs are insured up to Rs. 1 lakh.
  • Don’t forget to check on past performance:  Although past performances are generally not considered a very good indicator of the future of a company one should not completely avoid it. Any investor must check the past payment history of the company. He should also check the investor service standards of the company.
  • Don’t hesitate with regulator assistance: There are regulators to keep a check on any frauds or mishandling of public money by companies or mutual funds or exchanges. So in case your company defaults; check who the regulator is and lodge a complaint with them. For listed companies you can file your complaint with the Securities and Exchange Board of India. For manufacturing companies it is Department of Company Affairs. For banks and non-banking financial companies it is the Reserve Bank of India.

 

Pros and Cons of Company Fixed Deposits

 Pros:

  • Higher Interest rate (9% to 16%) as compared to Bank Deposits (9 to 10%)
  • These are short term deposits (Ranging from 6 months to 1 year) generally. Good companies though offer 3 year Fixed deposits.
  • Income tax is not deducted at source if the interest income is less than 500
  •  Deposit can be spread in more than one company so as to keep the interest income lower than 5000 from each of them to avoid tax deduction at source

 

Cons:

  • Company Deposits are not Secured by RBI as done for Bank Deposits
  • Procedure of foreclosure is complex and not smooth. Guidelines may vary from company to company
  • Possibility of default of payment by company is high as compared to Bank Deposit
  • Proper research needs to be done before choosing a company for investment

 

Interest Rates offered by various Corporate FD’s

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Some of the Trusted Corporate FD’s which you can pick

Company

Interest Rate

Jaypee Infratech

12.5%

Shriram Transport

10.5 %

Network 18 Media

11.5%

How to invest?

If you are looking for investing in Corporate FD’s. you can contact us.

Conclusion

If you are comfortable with doing a little bit of research, Company Deposits can be promising investment options. Basic rule is to go with renowned names with proven track record. It’s not advisable to be invested in long term deposits as default risk increases with tenure. Enjoy the new armor in your kitty.

 

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Rajesh Singla

Rajesh is the founder & CEO of Stockssavvy, Stocks analyst,financial advisor by choice,software engineer by fate,biker,gamer,cricket lover n enthusiastic person. He believes in doing things not just to get by but to get Ahead...

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