Most investors, apart from investing in the traditional and most trusted deposit instrument- The Fixed Deposits (FDs), opt for investing in instruments like the Company Deposits (CDs). Although their main advantage is that they carry a slightly higher percentage than the Fixed Deposits, they also throw a lot of risk for the investor. This is because, in case of FDs, the bank insures about Rs1 lakh, against which the CDs are the bearers of the specific company’s risk.
Now the real estate CDs are seen as the most volatile market in the wake of the 2008 recession since it is the property sector that has received a huge blow. But citing a profit in the future in the eventuality of an economic stability, investors are anticipating for a bounce back from this sector. If you are one such investor, here is what you should know:
Sector risk:
There is no doubt this sector is pretty much going through its rough phase and may take quite some more time to recover. This can be assessed merely by analyzing the higher cost of services that are being rendered. The cost of raw materials, shortage of labor supply etc have been proving to be the most critical factors in this sector leading to delay in the finishing and delivery of not only the future projects but also the ongoing ones, thus, reducing the possibility of earning profits in the long run. Such hikes in input prices and low revenue generation have increased the amount of debt of these companies which has put these companies under huge pressure. Apart from the various restrictions for capital access, the various scams and ghotalas of lands that the country is facing today also reduces the chances of increasing the revenue, since not many customers will wish to put their money into such controversial deals.
Company Risk:
It is true that CDs do carry risk but if these CDs belong to the vulnerable sectors like the real estate, then the fear of risk can become acute. These trying times have put many realtors into huge amounts of debts, which can delay their chances for opting for the road to recovery. As these Company deposits are unsecured instruments, in the eventuality of a bankruptcy, you may hope to get back your investments only after other secured lenders and preferential shareholders have been paid out. Else, all your investments are going to wiped out along with them or. Debts like personal loan, home loan etc will be the only choice left in order to finance your private propositions.
What you need to do:
As a prudent investor, although land is one of those assets whose value can most probably appreciate over time, it is advised to not invest in the real estate sector. Diversification is important but not at the stake of an investor’s profitability. It is good to have a CD in your portfolio, but ensure that you choose a company that has been quite stable in the last 5 years and continues do so. Important factors like risk assessment and the credibility of the company etc must be analyzed taking into consideration even the minute details. This can be done by looking into the company’s debt and loan repayment ability.
Reiterating, investments into CDs should be done only after you have invested rigorously into other assets like MFs, FDs, Gold (through ETFs) etc. After exhausting these options the probability of choosing a CD should depend upon the company’s risk profile, whether the company has cleared its past dues, its performance in the last 3 years etc. Also ensure that, if you are willing to take the risk and want to invest in the real estate sector, invest in only those firms who have received an AAA or AA ratings from independent rating agencies like CARE, Icra or Crisil. Also make sure that you opt for a short term preferably from 1-3 years. This will enable you track the performance of the company thereby securing your funds up to a certain limit.