Fixed Deposits : Study The Company Well Before
Investing..!
By Mr. Arnav Pandya, CFP
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 can not 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.
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| Arnav Pandya, CFP |
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 & 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.
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