Debt Instruments Pave the Way for Profitability

By BankBazaar | May 14, 2012

Investors in fixed income instruments are constantly in the lookout for products or tools that offer higher rates of interest than others. As interest rates continue to spiral their way upwards, debt instruments like company deposits and bonds have proved that they are quite the catch in terms of returns and diversity. Company fixed deposits, unlike bank fixed deposits, offer higher returns, but are relatively riskier as compared to other debt instruments. In order to opt for a reliable firm, invest in company fixed deposits through an agent or a distributor. If you are seeking to invest in bonds, then you can purchase them once the company has made its Initial Public Offer. Company deposits are best suited for individuals who prefer a regular source of income. You also enjoy the flexibility of receiving returns in time frame of your choice, i.e., monthly, quarterly, or annually. In the case of bonds, you can receive income either by way of a coupon of interest that is payable in accordance to a time frame of your choice, or by way of capital appreciation. Investment in bonds may not be such a good idea if the interest rates continue to rise, as with a rise in the rate of inflation, the price of bonds could slide down. If you are not looking for regular funds, then you can purchase bonds and maintain them till they attain their date of maturity.

The reason why people refrain from placing their investments in debt funds may be because these funds, unlike mutual funds, lack liquidity in them. This is because as these instruments are issued in relatively smaller sizes, and once the initial seller completes his role and walks away, there is a fall in trading. Subsequently, their procedure of exit is quite complicated and time consuming. If you have made investments in company deposits, then you will not be allowed to withdraw your funds on a premature basis, before the completion of 3 months after investment. If you still withdraw after the stipulated period, then you will witness a sharp decline in returns. Another reason why company deposits are considered to be unstable sources of income is because they are unsecured debt instruments. You do enjoy any claim of guarantee on your investment and if the financial position of the company witnesses a debacle, then so will your investments. Your money will come in line of pay back only after all liability to its secure lenders has been cleared off. In matters of taxation, bonds are far more tax-efficient as compared to company deposits. This is because if you have held your bond for a short period of time, and have recorded any gain on the same, then you only need to pay a short-term tax against your fund. If you hold your bond for a longer period of time, say for a year or more, then you need to pay a long-term capital gain tax.

If you have decided to place your investments in company deposits, then remember to conduct extensive research before you park your funds in such a company. Check the credit rating of the company before making any investment in it. Companies with a credit rating of AA or AAA are preferable as they encompass the scope for reliability and profitability. Avoid investing in smaller companies as you will be subjected to higher risk. You might as well end up borrowing debt like personal loan or a home loan to bridge the gap between your finances and your goal due to ineffective investment techniques. Verify all information such as the reputation of the firm, its performance till date and so on to ensure that your hard-earned funds have been invested in the right place and in the right manner.

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