It has been quite a while since bank Fixed Deposit rates started falling. Rates that were above 10% are now down to 7%. That’s a steep fall, especially for senior citizens who mostly tend to invest in bank Fixed Deposits.
It all started with the State Bank of India (SBI) cutting deposit rates way back in 2014. Since then, almost all banks have cut their deposit rates across short, medium and long-tenure deposits by more than 3%. Recently, interest rates have fallen further without any rate cuts by the Reserve Bank of India (RBI). This may be the reason why interest in corporate Fixed Deposits and Non-Convertible debentures (NCD) are increasing by the day.
Company Fixed Deposits give higher tax adjusted returns when compared to bank FDs, which is crucial for those in the highest tax bracket. Even NCDs are offering higher returns than bank FDs.
Take Muthoot Finance for instance. The company issued NCDs in April 2017. The interest rate offered to retail investors was 8% – 9% per year, depending on the payout option and duration of the bond. This is much higher than bank deposits, which varies between 6% – 7% for various tenures.
Companies might come out with similar NCD offers in the coming months. There are also plenty of company deposits that you could look at, but there are also several points to note before you choose one.
What role will these deposits play in your portfolio?
Just because these instruments offer higher yields, you shouldn’t look to invest all your money in them. It is important to allocate a percentage of your portfolio based on your age, goals and risk appetite.
Young people could look at higher yields for their debt portfolio by decreasing investment in bank Fixed Deposits and investing the same in a company deposit or NCDs. If you are a conservative investor who invests predominantly in bank deposits, then corporate deposits are a better option.
If you are in your 20s and aren’t looking to invest in Debt Mutual Funds, then try and allocate at least 20% of your debt portfolio towards investing in company FDs. Note that at this stage debt should form only a small percentage of your overall portfolio. With age on your side, you should look to invest more in equity than in debt.
For a middle-aged investor, company deposits are ideal instruments for locking in their savings at fixed-interest rates for an extended period of time. This way you can save for your retirement, your children’s education or marriage, or any other such goals.
Older investors will typically have higher debt in their portfolios and will also need higher returns to meet their everyday expenses over the short term. By investing in corporate deposits, retirees can get higher inflation adjusted returns.
So, the conclusion is that it would be beneficial for young investors to allocate their entire debt portfolio towards company FDs, while the seniors will need to be cautious since company deposits could be risky.
Additional Reading: What Are The Best Ways To Invest After Retirement?
What are the risks involved?
Corporate deposits or NCDs involve a number of risks like credit risk or default risk. This means that the investor faces the risk of default on interest as it becomes due at the time of maturity. How do you counter such risks? You should look at investing only in rated corporate deposits. Ideally, most investors should stick to AAA rated company deposits, although minimal investment in an AA rating deposit is still relatively safe.
Another important factor to take into consideration is liquidity. Most company deposits state in their application forms that repayment of the deposit, if withdrawn prematurely, is at the discretion of the company. This means that the company reserves the right to not return your principal until maturity, even if you want to make a premature withdrawal.
So, in case you need money during an emergency, you might not be able to get your hands on your company deposit easily. Even if you manage to get your money, the penalty levied may be quite hefty. Typically, company deposits cannot be broken unless you hold them for at least 6 months. However, even if you choose to withdraw your money after that period of time, you will still have to pay a penalty of around 2%-4% on the interest rate at which you invested.
So, if liquidity is something you’re concerned about, then it would be advisable to not invest in company deposits. This is precisely the reason why retirees shouldn’t invest large amounts in these deposits. The liquidity for NCDs is very similar. Even though NCDs are listed on stock exchanges, they are not actively traded. It will be very tough for you to find buyers in case you want to sell your NCD before maturity.
Also note that there are several instances where interest payments by companies that issued the deposits have been delayed. This is because interest payments are at the discretion of the firm. Unlike a bank deposit, where interest gets credited on a particular day of the month, quarter or year, the interest payments on company deposits could vary.
Senior citizens who need regular interest payments should take note of this. It might be beneficial for those requiring a regular income to invest in sovereign fixed income instruments such as the National Savings Certificate (NSC). If you are retired, you could also consider the Senior Citizen Savings Scheme (SCSS).
Do Your Research
You need to do some research before you choose corporate deposits or NCDs. Understand that not all companies are authorised to offer deposits. In fact, deposit taking norms have been made more stringent by the Securities Exchange Board of India (SEBI) recently.
According to the new rules, if public limited companies want to offer deposits, they need to have a net worth of over Rs. 100 crore. A huge increase from the previous net worth of Rs.1 crore. They are also supposed to have a turnover exceeding Rs. 500 crore. It is mandatory for all eligible companies to get a credit rating every year from a recognised credit rating agency for their deposits.
You have to look at the financial performance of the firm as well. The present financial health and profitability of the company is very important for you to understand, in the case of default risks. You could avoid a lot of hassle by investing with rated firms who offer deposits for short tenures.
Note that choosing longer tenures for these deposits will mean more risk. Also, don’t invest in a single company. Invest across firms to lower your risks. Here’s how to make the most of your investments in company deposits.
- Choose short term deposits.
- Don’t invest in one company.
- Ratings of company deposits are revised from time to time. Keep track.
- Never invest in company deposits that have no credit rating.
- Find out whether there are any complaints about the company or its deposits.
- Check the company’s financials.
- Choose listed companies over unlisted ones.
Additional Reading: Research Is Critical In Company Fixed Deposits
If you think that company deposits or NCDs are too risky, stick to bank Fixed Deposits. However, do compare across banks to get the best rates and terms.