 "Avoid locking into corporate FDs of longer tenures, say analysts")
Bank fixed deposit (FD) rates have come down over the past few years. State Bank of India, for instance, offers rates of 2.9-5.4 per cent (3.4-6.2 per cent to senior citizens) for tenures ranging between 7 days and 10 years. With returns from bank FDs failing to beat inflation, investors are looking for better alternatives. Currently, several AAA-rated company FDs are available that offer returns of up to 8.25 per cent.
Higher returns
Company FDs are popular among many fixed-income investors because they offer better rates.
Sahil Arora, senior director, PaisaBazaar, says, “They usually offer higher interest rates than bank FDs.” They also offer a number of payout options that investors can choose from — monthly, quarterly, half-yearly, and yearly. Ratings from credit rating agencies provide investors a reasonable estimate of the quality of the FD.
Corporate FDs offer higher certainty than debt mutual funds (MFs) as their interest rates remain fixed during their tenures and don’t fluctuate with changes in policy and market rates.
Default risk
Their higher returns, however, come with higher risks. Adhil Shetty, chief executive officer (CEO), BankBazaar, says, “The biggest risk they carry is credit risk — the uncertainty that the company may not be able to pay back either the interest or the principal.”
Remember that credit ratings provide an idea of only the probability of default. A highly rated corporate FD is safer, but there are no assurances. Shetty says, “In the past, even highly rated corporate FDs have def-aulted. They failed to either pay interest or return the principal on time to depositors.”
Company FDs are not backed by an insurance cover.
Arora says, “Bank deposits — including current, fixed, and recurring of up to Rs 5 lakh in each scheduled bank — are covered by the depositor insurance programme offered by the Deposit Insurance and Credit Guarantee Corporation, a Reserve Bank of India subsidiary.”
Should you invest?
Before investing in a company FD, check whether the company’s financial and other parameters are sound. Shetty says, “Spend some time in trying to understand the company’s management and business model before investing. After all, by investing in a corporate FD, you are lending money to the corporate.”
In the current environment, retail investors should stick to AAA-rated corporate FDs.
As for who should invest, Arora says, “Investors having higher risk appetite and seeking higher returns than bank FDs, or those seeking higher income certainty than they would get in debt funds, can opt for corporate FDs.”
According to Tarun Birani, founder and CEO, TBNG Capital Advisors, “These are large, credible groups. Park a portion of your debt allocation into these FDs for the short term.”
Some experts are of the view that you should invest in them for only one year.
Jharna Agarwal, head, Anand Rathi Preferred, says, “Check the liquidity position of these high-rated companies and then go for a one-year deposit. The markets will price in rate-hike expectations over the next year. After a year, the maturity proceeds can be moved back to MFs.”
Avoid committing money for the longer term for two reasons. One, after a year, there could be opportunities to deploy funds at better rates. Two, it is difficult to predict the stability of companies with which deposits are made over the longer term.
Investors in the higher tax brackets should avoid company FDs and stick to debt MFs.
Birani says, “Interest income from company FDs will get added to the investor’s income. Even if you earn 7 per cent interest and pay 40 per cent tax, you will end up with only around 4 percent. Debt MFs are far more tax efficient.”
