Company deposits carry a high default risk!

By BankBazaar | April 16, 2011

While bank fixed deposits of up to Rs. 1 lakh per bank branch are secured by Deposit Insurance and Credit Guarantee Corporation, there is no such guarantee on CDs. Investing your hard earned money and losing it, will be highly undesirable as it will lead to extreme conditions of you getting into a debt trap of a loan, personal loan home loan etc.

Here are some things you need to keep in mind when going forward towards investing in CDs:

Credit Rating:

It is very important for investors to check the credit ratings of the company in which they plan to invest from sources like CIBIL, ICRA etc. As a prudent investor, you must look forward to invest only in those companies that have high rating as they have strong principles and fundamentals are not likely to default.

Check promoter credibility:

“If a Tata group company offers 10% per annum and a relatively unknown company offers 11% per annum, one should invest in the Tata group company as the chances of losing deposits is negligible,” says Ashish Kapur, chief executive officer, InvestShoppe Ltd, a Delhi-based brokerage and wealth management fund. Try to do a thorough back ground check on the promoters’ so that you can ignore those who seem to be dubious.

Don’t invest all in one:

As the saying goes, do not put all your eggs in one basket, diversify your savings’ avenues to more than one company, so that during a risk of being defaulted you will not lose a huge amount of your investments. Try to limit your savings only up to 10-15% in one company.

Review:

Your job does not get over, just by investing in CDs. You need to periodically, keep reviewing the performance of your company and make any changes in case you sense a downfall.

Tenors:

Try to invest in CDs with the investment tenor of not more than 3 years. Generally, it has been observed that, the companies’ policies are likely to be changes over time thereby increasing the risk of default.

Understanding the market:

Investors must understand the current market values of various sectors and then move onto investing only in those are risk free. For example, keeping the current market scenario in mind, investing in real sector, will be a bad idea, as the chances of it to become default are more and also most real estate firms are facing a serious cash flow problem.

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