 "Fixed deposit")
With rising geopolitical tensions impacting the global economy and inflation, talk of interest rate cuts has taken a back seat. Interest rates on select company fixed deposits (FDs) have inched up with the likes of Shriram Finance and Bajaj Finance recently hiking the coupon rates on their FDs and recurring deposits.
“The company/non-banking financial company (NBFC) FD rates are attractive in comparison to their non-convertible debentures (NCDs) in the secondary market and bank FDs. Shriram Finance is offering 9.30 per cent to senior citizens, whereas their NCDs are quoting at 8.9-9 per cent. Likewise, Bajaj FD is offering 8.85 per cent while its NCD is quoting at 8.35-8.40 per cent,” says Vikram Dalal, managing director, Synergee Capital Services.
Regulatory measures driving rates
Regulatory measures by the Reserve Bank of India (RBI) have impacted corporate FD interest rates. “The RBI’s measures regarding unsecured loans have reduced the supply of bank credit to NBFCs while simultaneously increasing their cost of funds. Many NBFCs have been forced to raise funds through alternative sources like bond markets and corporate FDs. Thus, NBFCs focusing on the unsecured segment are likely to increase their FD rates to meet the credit demand in this segment,” says Gaurav Aggarwal, chief product officer (credit products), Paisabazaar.
Entities such as ICICI Home Finance, Mahindra Finance, Shriram Finance, and Bajaj Finance have been raising money by issuing FDs with tenures of 12 to 60 months.
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Higher returns for a little extra risk
Company FDs can offer additional returns to those willing to take a bit of credit risk. “The returns are attractive compared to other fixed-income avenues. These returns are also available for longer tenures,” says Amol Joshi, founder, PlanRupee Investment Managers.
All fixed-income investors should ideally focus on the real interest rate — nominal interest rate minus the inflation rate. Most company FDs are currently offering positive real interest rates. Many of these FDs are rated AAA and AA by credit rating agencies, which indicates that they offer adequate safety of capital.
Corporate FDs also offer higher income certainty than debt mutual funds, bonds, and other market-linked fixed-income instruments. “The returns earned from corporate FDs would be the same as the booked rates and would not fluctuate in response to changes in policy rates, broader market interest rates, or other market-related factors,” says Aggarwal.
Beware default risk
Investing in lower-rated FDs would subject the investor to default risk. Company FDs also generally come with penalties for premature withdrawal.
Who should invest?
Company FDs are for fixed-income investors willing to take some risk. “Investors having higher risk appetite and looking for higher returns than bank FDs but with higher income certainty than market-linked fixed-income instruments should opt for corporate FDs,” says Aggarwal.
Invest in them only after you have built your core fixed-income portfolio using small savings instruments and bank FDs. “Investors should complete their allocation to Public Provident Fund (PPF), Voluntary Provident Fund (VPF) and then choose company FDs. They should not allocate more than 15 per cent of their financial net worth to these offerings,” says Joshi.
Alternatives you may explore
Some small finance banks and a few private-sector banks are also offering FD yields of 8 per cent and above. Also, while company FDs offer higher returns than bank FDs, the latter have a safety net with FDs of up to Rs 5 lakh opened with each scheduled bank being covered under the deposit insurance programme offered by the Deposit Insurance and Credit Guarantee Corporation (DICGC).
Stick to quality
Stick to corporate FDs having a credit rating of AA and AAA. While lower-rated FDs offer higher returns, going for them could potentially put your principal at risk.
Finally, ladder these instruments. This will ensure cash flows at regular intervals. It will also protect you from reinvestment risk — the risk of having your FDs mature at the lower end of the interest-rate cycle, forcing you to reinvest at lower rates.
