As bank deposit rates are witnessing a fall and the Reserve Bank of India (RBI) is looking to slash interest rates in the next few months, company fixed deposits have started gaining popularity. Experts believe that investors should look at investing in company FDs that will fetch them higher returns than bank deposits as rate cuts in 2015 could further lead to a fall in bank deposit rates.
While leading banks like State Bank of India (SBI) pay a maximum of 8.5 per cent on a one to three year deposit, company fixed deposit are offering almost 100-150 bps higher than the former.
Experts note that it is a viable option for investors to invest in company fixed deposits, for a higher tenure, which will fetch them higher returns, given the imminent fall in fixed deposit rates this year. While Dewan Housing Finance offers a return of 9.50 per cent on a one-year deposit, Shriram Transport Finance gives out 8.88 per cent, to its investors. Some companies offer an additional interest of 0.25-0.50 per cent to senior citizens.
Which one is a better deal?
If you are keen on investing in a company FD, you should perform a background check on the company, lock-in period, if any, and its past performance. Now, bank FDs are closely supervised by the RBI and the Government of India. While returns on FDs are relatively risk free, one must also note that only a maximum of Rs one lakh is covered under deposit insurance. This means that if your bank gets liquidated or amalgamated, a maximum of Rs one lakh will be paid to you. This facility insures all bank deposits such as savings, fixed, current and recurring against losses arising from failure of a bank. You must bear in mind that there is no insurance on your amount parked in company deposits.
Experts say while investing in a corporate FD, one has to carefully check the credit rating of the FD provided by the rating agency. The rating will more or less indicate the safety of the product. It is always advisable to invest in a company FD that commands a higher rating, such as AAA or AA only, to keep investments safe. Rating is equally important for banks. But scheduled commercial banks, whether public or private, offer high level of safety, by virtue of the fact that they are closely supervised by the RBI and public sector banks, owned by the GOI, which makes them relatively safer.
Investing in FDs
Experts say that for investors, a general thumb rule is to invest is (100 – your age) into equities and balance into debt and liquid investments. Investments in FDs could be a maximum of 20-50 per cent of your debt allocation, depending on your income and the overall ability to take risks.
Investments in fixed deposits should be guided by the asset allocation coming out of goals and risk profile, after taking into account the income and age of the investor. In a high inflation scenario and for investors with higher incomes, in the higher tax bracket, to earn real return, it is advisable to look at asset classes like equity mutual funds or long term debt mutual funds for long term investments. For investors with lower incomes and lower tax bracket, FDs could be a good way to earn predictable returns.