Bank deposit interest rates are falling. Company deposits seem lucrative. But are they a viable option for investors? Find out.
Interest rates started falling 2 years back and have not stopped since then. A bank Fixed Deposit that was giving you 10% in 2014 might give you only 7% today. Consider this: If you had invested Rs. 1 lakh for 2 years at 10%, you would have received Rs. 21,840 as total interest. This will be only Rs. 14,888 today which is 32% lesser than what you would have earned. So, is there an alternative? Of course! There are Mutual Funds and Company Fixed Deposits that can give returns of 10%-12% a year. If you want anything that is linked to the markets and think Mutual Funds are risky, consider company deposits. These deposits give you higher tax-adjusted returns when compared to bank deposits, which is crucial, especially for senior citizens.
However, company deposits are not as safe as bank deposits. The higher the return, the higher the risks. There are some things you should keep in mind while opting for company deposits. When investing in company Fixed Deposits, you must look at company financials, credentials of the promoters and past track record of the company. The deposit should also be rated by a Credit rating agency. A good rating is important if you want to ensure that your deposit remains safe from issues such as non-payment of interest and principal. It is also good to read online reviews of the company just to be sure that they are paying interest on time and there are no issues with the firm.
Company financials
Unlike banks that handle quite a bit of money, for companies, raising money is not their main business. So, there are companies that are lax in handling their Fixed Deposit investors. Also, if the financials of the firm are not great, there is a likelihood that the company may default when it comes to interest payments. When you look at company financials, there are four things that should be noted with care – business growth, profits, debt position and capital adequacy. Here are some companies that have a good financial track record and offer company deposits.
Additional Reading: 5 Simple Tips To Manage Multiple Fixed Deposits
Shriram Transport Finance – One of the leaders in transport finance, this company announced great results for the quarter ended 31st December 2017. The company’s Assets Under Management (AUM) went up by 18% year on year to Rs. 90,018 crore. The Net Interest Income stood at Rs. 1,742 crore, which is a 21% growth year on year. The company’s disbursement grew by 64.7% year on year and 8.1% quarter on quarter to Rs. 13,380 crore due to strong growth in new commercial vehicle financing and healthy growth in used commercial vehicle segment.
Shriram Transport Finance offers both cumulative and non-cumulative deposits. The interest rate for 60 months is fixed at 8.25%. It is 8.50% for senior citizens. The minimum deposit amount will be Rs. 5,000 for cumulative and Rs. 10,000 for non-cumulative deposits. Other tenures are also available. Deposits from this company have been rated FAAA by CRISIL and MAA by ICRA.
Dewan Housing Finance Limited – This company is a dominant housing finance player among the lower and middle-income groups. The company announced great results for the quarter ended 31st December 2017. Loans sanctioned increased by 75% to Rs. 16,55,245 lakhs from Rs. 9.45.941 lakhs in the previous year. DHFL sold 50% stake held by it in DFHFL Pramerica Life Insurance which added Rs. 1,969 crore to its net worth and increased its compounded annual growth rate by 400 basis points, to 19.3%.
Dewan Housing Finance offers both cumulative and non-cumulative deposits. The interest rate for 48 months is fixed at 8%. It is 8.25% for senior citizens. The minimum deposit amount will be Rs. 2,000 for most of the cumulative deposit schemes and Rs. 10,000 for non-cumulative deposits that don’t pay monthly interest. If you want a monthly interest option, you have to make a minimum deposit of Rs. 20,000. Other tenures are also available. Deposits from this company have been rated BWR FAAA by Brickwork and AAA (FD) by CARE.
Additional Reading: Everything You Need To Know About Fixed Deposits
Bajaj Finance Limited – This company is the most popular consumer finance company in India. Its results for the quarter ended 31st December 2017 were good. It posted a 31% increase in its revenues, which stands at Rs. 3,543 crores now. The firm’s Net Interest Income grew by 38% during the same period to touch Rs. 2,369 crores. Gross Non-Performing Assets (NPA) were at 1.67% and AUM grew by 33% to Rs. 76,384 crores.
Bajaj Finance offers both cumulative and non-cumulative deposits. The interest rate for 60 months is fixed at 8.05%. It is 8.30% for senior citizens. The minimum deposit amount will be Rs. 75,000 for most of the deposit schemes. Other tenures are also available. Deposits from this company have been rated FAAA by CRISIL and MAAA by ICRA.
Points to note
- Go for short-term deposits. This way you will be able to review the deposit and also have the freedom to choose other attractive options, if any.
- Don’t invest in just one company. Divide your investment between companies so that your portfolio is diversified. Sabharwal says “diversification is always a better strategy.”
- Look out for news. Ratings of company deposits are revised from time to time. Keep track of the ratings as well as the financials of the company.
If you are ready to take a bit more risk, go for debt Mutual Funds. Unlike interest from company deposits that are fully taxable, returns from your debt Mutual Funds will get indexation benefit if you hold them for 3 years.
Also, Mutual Funds are more liquid than corporate deposits. You can get your money within 2 business days. For company deposits, it can take months for getting your principal back if you want to withdraw your money before maturity. So, choose your investments carefully if you want to get the best returns and always keep it safe.