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Corporate FDs are making a comeback, but do your homework before you park your money in them.
The credit crunch is forcing more and more companies to source funds from retail investors through the old-and-tested fixed deposit route. To attract investors, they have increased interest rates by 50-100 basis points in the recent past to 11-12 per cent. Shriram Transport Finance, Gabriel India and JP Associates are among the companies treading down this path. And some companies are even raising money for six months. So, does it spell good news for the investor?
Well, it certainly adds variety to the list of investible asset classes for the retail investor. But whether you should go for corporate fixed deposits depends on your age and preference, say financial experts. If you are looking for safety, the extra bit of safety, then corporate deposits may suit you. And if you are a senior citizen, then this is one more tool in your investment toolbox. “However, if a person is young, he should still look at equities despite the global turmoil as the markets will eventually recover,” says J. Karthikeyan, Director (Research and Consulting), Finerva Financial Solutions, which deals with wealth management services.
Corporate deposits, however, don’t score over bank deposits because the returns are taxable as per the regular slab rates. For a senior citizen with an income below the taxable limit of Rs 1.9 lakh, a corporate deposit should fit the bill. But for most other investors, the effective yield on a, say, 11 per cent one-year corporate fixed deposit, would work out to a post-tax return of 7.7 per cent.
Corporate fixed deposits might suit you better when the rates are higher than those offered by banks. It may also suit high net worth investors when they are making syndicated loans to companies where the minimum deposit is high (around Rs 10 lakh) and interest rates are pre-negotiated. But that has its own set of risks. Investors must also assess the risk of each company before going in for a corporate deposit, and also assess the annual performance of the company. They must also look at credit ratings of the companies. Avoid non-banking finance companies and real estate companies as far as possible.
Investors must also spread their deposits over a large number of companies in different segments, and, preferably not more than 10 per cent should be invested with any single company.
But for many small investors, banks are a better bet. Many banks are offering 10.5-10.7 per cent interest rates (see They Are Back) and 50 basis points more for senior citizens. Banks are also offering shorter tenure deposits of 30-60 days for individuals, which is the popular choice these days. This also helps to set a time frame for any big expense that may be coming up. Says Karthikeyan: “Fixed deposits may be tax inefficient, but since the tenure is fixed, it’s a big help for any planned expense.”
—Nitya Varadarajan
Well, it certainly adds variety to the list of investible asset classes for the retail investor. But whether you should go for corporate fixed deposits depends on your age and preference, say financial experts. If you are looking for safety, the extra bit of safety, then corporate deposits may suit you. And if you are a senior citizen, then this is one more tool in your investment toolbox. “However, if a person is young, he should still look at equities despite the global turmoil as the markets will eventually recover,” says J. Karthikeyan, Director (Research and Consulting), Finerva Financial Solutions, which deals with wealth management services.
Corporate deposits, however, don’t score over bank deposits because the returns are taxable as per the regular slab rates. For a senior citizen with an income below the taxable limit of Rs 1.9 lakh, a corporate deposit should fit the bill. But for most other investors, the effective yield on a, say, 11 per cent one-year corporate fixed deposit, would work out to a post-tax return of 7.7 per cent.
Corporate fixed deposits might suit you better when the rates are higher than those offered by banks. It may also suit high net worth investors when they are making syndicated loans to companies where the minimum deposit is high (around Rs 10 lakh) and interest rates are pre-negotiated. But that has its own set of risks. Investors must also assess the risk of each company before going in for a corporate deposit, and also assess the annual performance of the company. They must also look at credit ratings of the companies. Avoid non-banking finance companies and real estate companies as far as possible.
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Investors must also spread their deposits over a large number of companies in different segments, and, preferably not more than 10 per cent should be invested with any single company.
But for many small investors, banks are a better bet. Many banks are offering 10.5-10.7 per cent interest rates (see They Are Back) and 50 basis points more for senior citizens. Banks are also offering shorter tenure deposits of 30-60 days for individuals, which is the popular choice these days. This also helps to set a time frame for any big expense that may be coming up. Says Karthikeyan: “Fixed deposits may be tax inefficient, but since the tenure is fixed, it’s a big help for any planned expense.”
—Nitya Varadarajan
