ARTICLES ON CORPORATE FIXED DEPOSIT

Nishit Agarwal 1111518 V BBA A

Article - 1 Invest in high quality company fixed deposits, says financial advisors
By Prashant Mahesh, ET Bureau Mar 22, 2013, 04.13PM IST MUMBAI: With interest rates expected to fall further, financial advisors are asking investors to lock their surplus funds in company deposits that pay higher higher interest rates. "Fixed income investors could take advantage of the current high interest rate scenario and invest in companies with a high rating and pedigree in line with their time horizon," says Jyotheesh Kumar, Senior VP, HDFC Securities. Investment experts are recommending deposits from companies such as HDFC Ltd, Shriram Unnati, Mahindra Finance, LIC Housing Finance, among others. HDFC Ltd is offering an interest rate of 9.4 pc, Shriram offers 10.75 pc while Mahindra Finance offers 10.25 pc and LIC Housing Finance offers you a return of 9.5 pc. All these companies have strong financials and reputed promoters. Experts caution investors not to be greedy and invest in fixed deposits of mid cap companies for higher returns. "Though mid cap companies may pay extra interest rates of 200 basis points or 2 pc, one must understand that it comes with higher risk," says Anup Bhaiya, MD and CEO, Money Honey Financial Services.

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The interest rate in the current economic situation has been on a downward trend. With this falling interest rate the risk of reinvestment is very high. Financial Advisors have been recommending investors to park their funds in corporate/company deposits with high interest rates. Many big corporate houses accumulate funds from the market at high interest rate for their needs. Corporate fixed deposits are normal fixed deposits offered by Companies. The interest rates offered are generally higher than Bank interest rates and can be in range from 9%-16%, When one thinks of company deposits, he/she must make sure which company to invest in. These companies accepting investors money are rated by the credit rating companies in terms of their financials, promoters, business profile, etc. We should look at these credit ratings while investing our hard earned money. Many companies like Mahindra & Mahindra, HDFC Ltd, etc have been giving good deposit rates for investors. These companies have good and strong financials and have been rated well by the credit rating agencies. We have seen in past many companies have defaulted with investors money. Many investors invested in these companies because they offered higher interest rates. We need to look that these mid size companies are able to get money from market because they offer higher rates, but one should look at their rating, financials, promoters, etc. One should know that with higher return comes higher risk. We should be very cautious when investing in company deposits because they carry risk like default risk and unsecured deposits. Hence, with the falling interest rates investors can park their fixed income savings in corporate deposits which have good credit ratings.

Article - 2 Good returns bring company fixed deposits back in rage

By Ruchira Roy, ET Bureau May 9, 2013, 10.02PM IST MUMBAI: Thirty-three-year-old Priya Prakash, an executive at a financial services firm, had some surplus funds to invest on which she wanted reasonable returns. The advice she received from family members is that she should invest them in a fixed deposit scheme of a company where the yields were more and not a bank. The number of people like Prakash are growing with companies such as Shriram Transport Finance, Mahindra and Mahindra Financial Services and Dewan Housing Finance offering 200-300 basis points more than what banks provide for three- or five-year deposits. Company deposit applicants have trebled. "The intent was to look for higher returns. I was advised to invest money in these company fixed deposits," says Prakash, who is comfortable with the 12.5% that she is getting from the company FD. "It was mainly the interest factor that got me to invest in company FDs. I was looking for higher returns and a strong background of the company." Company fixed deposits that used to be a rage in the late 90s lost their charm as businesses begin to access funds easily from the banking system. Also, instances of fraud forced regulators to come up with tough guidelines and link it to their net worth. But high inflation in negative real returns from bank deposits are making company deposits attractive again. So much is the attraction that when investors are pulling out funds from mutual funds, and bank deposits are growing at near-decade lows, the number of depositors for Mahindra Finance rose 60% year-on-year to 200,000 depositors. HDFC's deposits grew 37% to Rs 49,763 crore in December 2012, from ?36,293 crore a year earlier. Dewan Housing Finance's deposits nearly trebled to Rs 1,900 crore in March, from ?760 crore a year earlier. This is in contrast to banks where deposits grew 15% y-o-y. "The interest for good corporate FDs has increased," said V Ravi, CFO, Mahindra Finance. "We get 400-450 forms every day from 100-150 last year. There are three factors why these are popular stable avenue of income, safety of the investment due to the high reputation of the corporates and the interest rate arbitrage that has come down in debt schemes, owing to revision in dividend distribution for mutual funds," he added. Best-rated fixed deposits from Mahindra and Mahindra Finance offer 12.2% per annum and fixed deposits issued by Jaypee Group offer rates as high as 15.07% on a three-year FD on a cumulative basis. Against this, banks such as SBI offer 8.75% deposits of similar tenors and private banks like HDFC Bank are offering anywhere between 8% and 8.75%. Shriram Transport Finance FDs offer up to 11.94%, while Dewan Housing Finance offer 11.98% on an annualised basis for three-year deposits.

"In terms of rates, they are far more attractive than bank FDs. The plain vanilla blue-chip (company) FDs are not very attractive, but the ones offered by the real estate companies are being taken up by investors who have enough risk appetite. For ultra HNIs, they know that fixed deposits are also instruments that are tax-efficient," said Maneesh Kumar, MD, Burgeon Wealth Advisors. But there are experts who say that the biggest risks investors run are that of lack of liquidity. Investors cannot withdraw the money quickly unlike in bank deposits. These investments become riskier at times, when the economic slowdown puts pressure on their cash flows as well. "Investors have to make sure they are compensated well enough for the risk they are taking," said Devendra Nevgi, a financial expert for over two decades. "Another problem is the poor supply of corporate FDs. This is largely because companies have many more avenues to raise resources now than ever before. This becomes a problem for investors who are investing in these deposits, because when the tide turns, these companies may have liquidity issues."

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Investors always look at earning higher returns. With company deposits offering higher interest rates than banks, investors investing in these corporate deposits have increased manifold over the period of time. Companies like M&M, DHFL, HDFC Ltd, Shriram Transport Finance, etc have been offering higher interest rates than banks. With inflation at its peak, investors have seen negative returns with their funds in bank deposits. This has urged the need for investors to look for corporate deposits. Bank deposit rates have been nearly at a decade low. Many companies accepting deposits have seen increase in the investment amount recently due to reasons like stable income source, companies having good reputation in market and revision of DDT (Dividend Distribution Tax) for debt mutual fund schemes. Banks are currently offering interest rates in the range of 8-8.75% for three year fixed deposits. For the same tenure corporate with good credit ratings have been offering higher interest rates in the range of 10.5-12%. Hence, in terms of interest rates company deposits are far more attractive than other types of fixed income savings instruments.