Fixed deposits, particularly bank FDs, have been an ideal saving instrument for people seeking fixed returns with minimum risk. However, these days a majority of investors looking to invest in fixed deposits are said to be going for FDs launched by non-banking financial companies (NBFCs) like Mahindra Finance, Bajaj Finance etc, probably because they are offering much higher returns on their FDs than those currently being offered by banks.
For instance, while the State Bank of India – India’s largest bank – is offering 6.65% interest on its FDs for 2 years to less than 3 years, Mahindra Finance is offering 8.25% and Bajaj Finance is offering 8.15% interest on their FDs for the same tenure. Similarly, while SBI is offering 6.70% on its FDs for 3 years to less than 5 years, Mahindra Finance is offering 8.5% and Shriram Transport is offering 8.6% to 9.01%. Clearly, FDs offered by NBFCs seem more lucrative from the returns’ perspective. However, are they also a good bet for you?
Leading NBFC FD Interest Rates:
|>=1 to <=2||2 to <=3||3 to <=5|
|Shriram Transport||NA||7.6||7.9||8.6 – 9.01|
|Data taken from respective NBFCs’ website as on 13 June 2018|
|For each year range, maximum offered interest rate have been considered; Interest Rate for normal fixed deposit amount below Rs 1 Cr|
Financial experts say that NBFCs do offer a rate of return higher than bank fixed deposits and if used discreetly, are a good option for investors seeking fixed returns. However, what investors need to keep in mind is that these deposits are not secure and hence carry risk of default. Therefore, while trying to achieve higher fixed returns, investors need to chose only the best-performing NBFCs backed by years of consistent track record or promoted by very strong business groups.
“The reason that this is a very important factor to be kept in mind is because interest rates offered by different NBFCs vary a lot. Usually the blue chip firms offer interest rates that are only about 100 basis points higher than equivalent fixed deposit rates, whereas the lower grade firms offer much higher returns. Greed of earning higher returns lures investors towards the more lucrative offers from these firms. This is where the problem lies as the moment there is a default, the loss to the investor is usually the total amount and chances of recovery are very low,” says Ashish Kapur, CEO, Invest Shoppe India Ltd.
For any FD, whether a bank or NBFC, you also need to look at additional factors other than the rate of interest. “First and foremost, you need to get clarity on withdrawal and pre-mature withdrawal as investors opting for an FD would want high liquidity. Secondly, it’s recommended that you also check the credit rating for such deposits and select those with good rating. If you are an NRI or a senior citizen, you may want to check additional benefits offered to you for the same scheme,” says Adhil Shetty, CEO, Bankbazaar.com.
To conclude, it can be said that investing in NBFCs is certainly a better idea than investing in bank fixed deposits, but the options should be restricted to only the very well-established and high-quality ones even if they offer returns much lower than the average. “Fortunately NBFCs have been around for many years now and their track record, promoter background and other details are easily available, making it an easy task to sort out the reputable ones,” says Kapur.