Are corporate fixed deposits safe? Things to keep in mind before you invest
If you are a financially savvy investor with higher risk appetite and are familiar with risks that these instruments carry then you may consider Corporate FDs under your debt investment portfolio
- Nov 7, 2019,
- Updated Nov 7, 2019 10:33 PM IST
Corporate fixed deposits appear attractive owing to higher interest rates compared to the same on bank FDs. However, one must know that these are not backed by collateral and are unsecured in nature. Investors rely on the reputation and the credit rating of the corporate when investing in them. However, credit rating agencies have gone wrong on ratings multiple times in the past.
The crisis in Dewan Housing Finance Corporation and subsequent helplessness of investors stuck in its FDs hold a lesson. The rating agencies could not detect gradual deterioration in its financials and failed to give advance warning to the depositors. After the issue was already out in the open, the agencies quickly downgraded the company. However, investors got no time to react to the situation. The Bombay High Court had barred the company to make payments to fixed deposit holders without court's permission.
Investors learned it hard way that they should avoid the lure of higher returns and always consider all involved risks. We tell you how you should approach investment into a company fixed deposit.
If you are not much confident about the prospects of the company in the long run but still go for the FD, you better invest with a short-term view. For example, if you book the FD for one year, you will get frequent review opportunity and accordingly, you can reduce or increase your exposure. You should also make sure that you do not invest a large part of funds into one company. You can diversify your FDs across multiple companies to mitigate default risks.
Corporate fixed deposits appear attractive owing to higher interest rates compared to the same on bank FDs. However, one must know that these are not backed by collateral and are unsecured in nature. Investors rely on the reputation and the credit rating of the corporate when investing in them. However, credit rating agencies have gone wrong on ratings multiple times in the past.
The crisis in Dewan Housing Finance Corporation and subsequent helplessness of investors stuck in its FDs hold a lesson. The rating agencies could not detect gradual deterioration in its financials and failed to give advance warning to the depositors. After the issue was already out in the open, the agencies quickly downgraded the company. However, investors got no time to react to the situation. The Bombay High Court had barred the company to make payments to fixed deposit holders without court's permission.
Investors learned it hard way that they should avoid the lure of higher returns and always consider all involved risks. We tell you how you should approach investment into a company fixed deposit.
If you are not much confident about the prospects of the company in the long run but still go for the FD, you better invest with a short-term view. For example, if you book the FD for one year, you will get frequent review opportunity and accordingly, you can reduce or increase your exposure. You should also make sure that you do not invest a large part of funds into one company. You can diversify your FDs across multiple companies to mitigate default risks.