In the fixed income space, company fixed deposits (FDs) offer relatively higher rate of return. While interest rates on bank fixed deposits have come down quite significantly, one can still see several options wherein comparatively higher rates are available on company fixed deposits. The moot question is whether an investor should deem these as an option considering the risk element. It cannot be ignored that this investment class has caused quite a bit of pain for investors in the past. Considering the entire situation, here is a closer look at how investors can deal with this instrument in the present stage.
Nature of investment
Company fixed deposits are debt investments. They are just like a bank fixed deposits wherein the amount is invested for a specific time period at a specific rate of interest. The good part is that investors know about the rate of return and the period for which they will earn the interest. This makes various calculations related to the investment far easier. The biggest worry, however, is that company might default on payment of the amount at the specified time.
Returns
It is also vital for investors to take a look at returns of company fixed deposits offer. Normally, the returns are far higher than what is offered by bank fixed deposits. Companies are not immune to developments in the economy and hence rate of return that is being offered on these deposits is also coming down. There is still a small window of opportunity left for investors in case they want to lock in the money for a period of time at a good rate of interest. Interest rates offered by a pool of companies vary and this where investors need to be very careful.
Choose well
On one side of the spectrum are some well-run companies and financial institutions, including housing finance institutions, that offer fixed deposits. The rates here are higher than what the banks are paying but they will look lower than what many other companies offer. Those who want minimum risk only should not get swayed by higher rates given by other companies. They should look at getting a rate that is higher than what they would get from a bank fixed deposit.
Looking very closely at the entity in which the money will be put is crucial. This will remove some elements of worry for investors.
There are always options that offer a higher return. But this can cause some tension, especially when some bad news come to the market after the investment is made.
Investors should remember that due diligence is possible only till the time of the investment. It will not be possible to take out the money if some troubles come after the investment process is completed. There have been several cases wherein companies have defaulted and investors have been left high and dry. This is can be avoided if investors do proper due diligence while making the investment.
(The writer is a CA and certified financial planner)
