At a time when interest rates on bank fixed deposits (FDs) have been on a downward slope, Hawkins Cookers Ltd on Friday will launch its FDs at 9% interest for a three-year deposit and 8.5% for one-year FDs. In the current interest rate environment, the interest rates look attractive.
Financial planners, however, cautioned investors to understand the risks that come with company FDs before investing. “They are riskier than FDs of banks. Bank deposits are insured up to ₹5 lakh. Company FDs don’t have any such cover. If a company faces financial trouble, unsecured depositors can do little to get their money back,” said Malhar Majumder, partner, Positive Vibes Consulting and Advisory, a financial planning firm.
According to Majumder, if a company is raising money at a specific rate from depositors, it could also mean that banks are charging the firm a higher interest rate for loans. Most companies would go for an FD only when they are getting a lower rate compared with other sources of funds. “If a bank is giving a loan at, say 8%, the company will not accept deposits at a higher rate,” said Majumder.
According to planners, in the current environment, it’s best to stick with debt instruments with lower risks, even if it means compromising on the interest rate. “Higher interest rates mean higher risk,” said Arvind Rao, founder of Arvind Rao & Associates and a Sebi-registered investment adviser.
Should investors altogether avoid company FDs? “It makes sense for investors who understand the risk and invest only a part of their FD portfolio in them,” said Rao.
Of the FD portfolio, how much should investors put in company FDs depend on their risk appetite. It could be as low as 1% for some or a maximum of 5%, according to investment advisors.
“Company FDs can help to increase the overall debt portfolio returns. But they are not a replacement for safer options such as bank FDs or small savings scheme or RBI bonds,” said Rao.
Look at company FDs to diversify your debt portfolio only if your basics are covered—you have a stable income, and even if a deposit-taking company shuts down, your finances won’t get affected. Choose the lowest tenure available.
In the order of risk, government-back securities are the safest, then company FDs of large commercial banks, then FDs from prominent non-banking financial companies such as HDFC Ltd, and then corporate FDs. Understand this risk grading before you invest.