At a time when interest charges on financial institution 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 eight.5% for one-year FDs. In the present interest rate surroundings, the interest charges look engaging.
Financial planners, nonetheless, cautioned buyers to know the dangers that include firm FDs earlier than 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,” mentioned Malhar Majumder, accomplice, Positive Vibes Consulting and Advisory, a monetary planning agency.
According to Majumder, if an organization is elevating money at a particular rate from depositors, it may additionally imply that banks are charging the agency a better interest rate for loans. Most firms would go for an FD solely when they’re getting a decrease rate in contrast with different sources of funds. “If a bank is giving a loan at, say 8%, the company will not accept deposits at a higher rate,” mentioned Majumder.
According to planners, in the present surroundings, it is best to stay with debt devices with decrease dangers, even when it means compromising on the interest rate. “Higher interest rates mean higher risk,” mentioned Arvind Rao, founding father of Arvind Rao & Associates and a Sebi-registered funding adviser.
Should buyers altogether keep away from firm FDs? “It makes sense for investors who understand the risk and invest only a part of their FD portfolio in them,” mentioned Rao.
Of the FD portfolio, how a lot ought to buyers put in firm FDs rely on their danger urge for food. It may very well be as little as 1% for some or a most of 5%, in line with funding 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,” mentioned Rao.
Look at firm FDs to diversify your debt portfolio provided that your fundamentals are coated—you have a secure revenue, and even when a deposit-taking firm shuts down, your funds will not get affected. Choose the bottom tenure accessible.
In the order of danger, government-back securities are the most secure, then firm FDs of enormous industrial banks, then FDs from outstanding non-banking monetary firms akin to HDFC Ltd, after which company FDs. Understand this danger grading earlier than you invest.