Company FDs offer up to 8.6% interest rate; how to choose corporate fixed deposits for maximum returns High returns come with higher risks. Corporate FDs carry higher risks than bank FDs as they are typically unsecured and uninsured. Find out how to reduce your risks in corporate FDs and choose the right one from the myriad of options for optimal returns
Interest rates on bank fixed deposits (FDs) now hover around 7%-7.5% in most large public and private sector banks. Meanwhile, several companies are still offering over 8% interest rate on their FDs. Senior citizens can even earn an additional interest rate of 0.25%-0.50% on company FDs. Higher interest rates on company FDs could be attractive for many investors but be cautious. If you think corporate FDs are as safe as your bank deposits, here is the bad news. Corporate FDs carry higher risks than bank FDs as they are typically unsecured and uninsured. Does it mean you should stay clear of these fixed-income products? Not necessarily. Read on to find out how to reduce your risks in corporate FDs and choose the right one from the myriad of options for optimal returns.How to select company FDs for best returns
High returns often come with higher risks. This is true for corporate deposits as well. Corporate deposits are unsecured investments that offer a fixed return. These FDs are mostly offered by manufacturing companies and non-banking financial companies (NBFCs). AAA-and-AA-rated FDs are considered the safest among corporate FDs and they usually pay 0.75% to 1.5% higher interest than bank FDs. Further, there are multiple tenures with different frequencies of interest payments such as monthly, half-yearly, and yearly.
As corporate FDs are not typically backed by collateral, they carry higher risks. Moreover, bank deposits in each bank are insured up to Rs 5 lakh but corporate FDs are not. If the company is financially shaky, they may not even be able to pay the interest and, at times, even the principal amount. But if you can do your homework right and follow some basic strategies of investments, corporate FDs could give you decent returns, especially when interest rates are as high as they are now.
Company FDs: Check the credit ratings first
First, start with looking at the credit rating of the deposit that you are planning to invest in. Most of the companies prominently display the rating for their deposits on their websites. Mahindra Finance, for instance, has a triple-A (displayed as AAA) rating from Crisil. Muthoot Capital Services Limited, on the other hand, has an A+ rating by CRISIL. As the rating dips to AA and A, the risk with the FD increases even though they are highly rated FDs.
If you want the safest corporate FD, then you should look for a triple-A (AAA) rated company. "If the safety of capital is of paramount importance to you, stick with AAA-rated bonds that have essentially never defaulted in the recent past," says Aniruddha Bose, Chief Business Officer, FinEdge. There are risks in AA and A-rated company FDs but the likelihood of a default is very low. "Even AA-rated bonds have defaulted, although a miniscule 0.28% of the time. A-rated 3-year bonds have defaulted more than 1% of the time. Anything below AAA entails a certain degree of risk-taking and requires a careful evaluation of whether the incremental short-term returns are worth it."
Crisil, ICRA, Fitch, and CARE are agencies that do most of the ratings. You can look at their websites as well.
Company FDs: But don't just go by high ratings
"Even though companies are rated by credit rating agencies, there is always a risk that the company's financial health may deteriorate over time, leading to default on FD repayments," says Saurabh Jain, Co-Founder, of Stable Money.
For non-banking financial companies, you need to look beyond the ratings. Look at their balance sheet for debt-secured and unsecured loans. If the total debt is over twice the net worth, you should be cautious, said experts. To understand if a company is making enough profit to repay your money, you can also check their annual reports and financial statements. Usually, these documents are available on the company's website. "Firstly, ensure that the company is compliant with the rules and regulations of the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI). Secondly, consider the company’s financial performance and stability over the years, with a keen eye on its annual reports, financial statements, and profitability trends. A company indicating consistent long-term growth, robust balance sheet, and solid profit margins will serve you well," says Raghvendra Nath, MD, Ladderup Wealth Management.
"Opt for a company with a proven record of accomplishment of keeping its customers satisfied and a history of profitability. This information is readily accessible through the websites of financial institutions, making it easier for investors to compare various options and select the most suitable one," says Jain.
"Highly leveraged companies even if having a strong rating might be avoidable to look at. Also long duration investments at times can be avoided especially with companies that have high debt," says Vivek Banka, Co-Founder, GoalTeller.
Avoid little-known company FDs
You can also consider checking how promptly the company provides the FD receipt or pays the interest. It is best to refrain from little-known names that you have never heard of before, even if they are offering a handsome return. "Investigate whether the company has a consistent history of repaying fixed deposits and meeting interest payment obligations. The FD market has become increasingly competitive, but instances of companies failing to fulfill their financial commitments on time have been reported. It's crucial to ensure that the chosen institution has a reputation for reliability in this aspect," says Jain.
Company FDs premature withdrawal: Stringent rules, high penalty
Corporate FDs are not as liquid as traditional bank FDs. Most companies usually follow stringent premature withdrawal rules and a steep penalty. The penalty amount to withdraw money prematurely from corporate deposits is typically higher than what banks usually charge. It often depends on the discretion of the company whether they allow premature withdrawal of funds or not. So, it is crucial to know the liquidity situation and rules of the company before investing. "It is important to consider the liquidity of your FD because there may come a time when you need to withdraw your funds immediately. Choose company FDs with a comparatively lower penalty, if you may need to withdraw the funds for emergencies," says Nath.
Company FDs: Remember the basic rules of investment
Lastly, remember the basic thumb rules of investment while putting money in company FDs. Don't put all your money in one company FD, thinking it will generate high returns. "You should avoid investing all your savings in a single company’s FD since diversification can help you mitigate your risk while maintaining the stability of your earnings," says Nath.
You can invest a part of your savings in company FDs for short-to-medium terms. Avoid committing money for the longer term as it is difficult to predict the stability of companies in the longer run.
"Look into the company’s track record, financial stability, and risk of default, before trusting them with your savings. It is advisable to invest in company FDs offering returns which are aligned with market standards because high returns almost always come with higher risk and an FD should not be a high-risk asset," he adds.
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This story originally appeared on: India Times - Author:Faqs of Insurances
