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| Factor in the risk element |
| Neha Pandey / Mumbai Feb 24, 2010, 00:41 IST |
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With interest rates beginning to inch upwards, companies are entering the deposit market to raise funds aggressively. The interest rates on offer are quite impressive as well.
Currently, Tata Motors is offering 8.75 per cent for three-year deposits and 8 per cent for two years. Jindal Steel and Power is giving 8 per cent for one year, 8.25 per cent for two years and 8.50 per cent for three years.
There are some who are offering much higher rates. United Spirits is offering 11 per cent for one-year deposits and 11.50 per cent for two years. Network18, whose issue closed recently, was paying up to 12 per cent for one, two and three years.
According to a company executive, deposit schemes are being launched to take advantage of low rates offered by bank fixed deposits. And, though banks deposit rates have started moving up, industry experts say it will take sometime before banks offer over 8 per cent return.
Interest rates on offer by banks are visibly lower. And, while some of them have revised rates recently such as HDFC Bank, IDBI Bank, Union Bank of India and Jammu & Kashmir Bank, they are still quite low.
For instance, HDFC Bank is offering 5.75 per cent on one-year deposits, 6.50 per cent for one to two-year deposits and 7 per cent for two to three years.
IDBI Bank is giving 6 per cent on 6 months to less than one year, 6.75 per cent for 1 year to less than 500 days, 7 per cent for 500 days and 7.25 per cent for two to three years.
Sandeep Shanbhag, director, Wonderland Investments, said, “Many investors are getting lured by corporate deposits because of high post-tax returns.”
However, investors should remember these instruments carry an element of risk as well. “Investors need to be compensated for the risk they are taking with these deposits. Being more risky than bank deposits, corporate deposits offer higher rates than banks,” said Kartik Varma, co-founder, iTrust Financial Advisors.
Corporate deposits are unsecured loans because if the company defaults, there isn’t much recourse for the investor. Some of the alternative investment option in the current market could be non-convertible debentures (NCDs) and bank deposits.
Anoll Merchant of Merchant Investment Consultancy, said, “NCDs have a reservation for different category of investors, and they allot units on first-come-first-serve basis. Therefore, retail investors get restricted on the amount that can be deposited.”
But, one should not get too swayed by the numbers and keep only a portion of their portfolio in corporate deposits. “Corporate deposits can form 5 to 10 per cent of a portfolio,” said Shanbhag. And, those with big amounts to invest, could diversify among different companies, he added.
Experts said there was a rush from companies to raise cash now, because in the next two quarters, it was expected interest rates would start climbing. “Raising money now will help them see through a high interest rate regime,” said an industry source.
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