Fixed Income: Company FDs regain their shine | The Financial Express

Fixed Income: Company FDs regain their shine

In the quest for higher rates, don’t forget to check out credit rating

Fixed Income: Company FDs regain their shine
“While this is not the case for all corporate FDs, unless they are looking at an AAA-rated NBFC, retail investors may be better off looking at alternatives,” he says.

While interest rates of company fixed deposits (FD) are rising at a faster clip than bank deposits, risk-averse must look at the risks of investing in these deposits. They should ideally invest in AAA-rated companies as higher ratings would imply higher income certainty and capital protection. Investors must calibrate their risk and return expectations as higher the returns, the higher the risks.

Investors having a higher risk appetite and aiming at higher returns from FDs but at higher income certainty than bonds and debt funds can opt for company FDs. Moreover, unlike a bank deposit where the principal and the interest of Rs 5 lakh is insured under Deposit Insurance and Credit Guarantee Corporation, this is not the case with company deposits.

Gaurav Aggarwal, senior director, Paisabazaar, says before opening company FDs, investors should also compare the FD interest rates offered by small finance banks and private sector banks. “Some of these scheduled banks are offering annual yields of 7.5% and above. Opening FDs with these banks would earn similar yields for the investors at much lower risk,” he says.

Also Read: Your Money: Does your insurance policy align with your life goals?

Credit risk
The interest rates of company deposits are higher because there is an additional risk. Adhil Shetty, CEO, Bankbazaar.com, says the largest credit risk at this point is that the company may not be able to pay back the depositor in terms of interest or the principal. “While this is not the case for all corporate FDs, unless they are looking at an AAA-rated NBFC, retail investors may be better off looking at alternatives,” he says.

Credit rating is one parameter that gives you an idea of the probability of default. However, even a highly rated corporate FD only reflects relative safety but cannot assure it. “It has been seen in the past that even highly rated company FDs have defaulted and are unable to return principal and interest to depositors on time,” says Shetty and adds that investors should always spend a little time understanding the company’s management and business model before investing.

Depositors should prefer shorter tenures, preferably 1-2 years, while booking company FDs and should opt for longer tenures only when they are sure that the broader market interest rates have peaked. They must look at laddering deposits into multiple fixed deposit accounts of varying terms to earn high returns with liquidity at regular intervals. Investors must note that just like bank FDs, company FDs usually have penal rates for premature withdrawals and the returns from company FDs are taxed as per the tax slab of the investors.

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First published on: 18-11-2022 at 00:30 IST