Four things to check for in a Fixed Deposit

By Neha Pandey Deoras

At present, investment experts are advising their clients to get locked into company deposits before an interest cut comes into effect. The Reserve Bank of India (RBI) is expected to slash interest rates, which will lead to a cut in bank deposit rates, which in turn will lower company deposit rates in the not too distant future.

While the State Bank of India offers an interest of 8.75 per cent on fixed deposits with 1-3 year maturity and financial institutions are paying up to 9.25 per cent, manufacturing firms at 10.25-11 per cent are paying considerably more. However, don’t get swayed by interest rates alone. There are a host of factors that need to be considered before you invest in a company fixed deposit scheme.

Credit rating

Fixed deposit schemes are graded by credit rating agencies such as Crisil, India Ratings, Fitch, CARE and others. Checking the ratings is the first step towards selecting a company fixed deposit scheme. For instance, DHFL is rated AAA by CARE. This rating indicates the highest degree of safety vis-avis timely servicing of financial obligations, and hence it carries the lowest credit risk. Similarly, HDFC is rated MAAA by ICRA and FAAA by Crisil. Both these ratings indicate the highest credit quality and the lowest credit risk for the deposit scheme.

Among the manufacturing firms, Gati is rated moderately safe (BBB+ by CARE), Godrej & Boyce is rated highly safe (FAA by Crisil), KCP is negative (FA by Crisil), indicating more risk, Prism Cement is rated adequately safe (IND tA by India Rating) and Ceat has a stable rating (IND tA+).

“If you want to invest in a company deposit as part of your retirement plan and you have 30 years to go, you can invest up to 30 per cent of your deposit portfolio. If you are investing in company deposits with a horizon of three years, you can invest 50 per cent of your overall deposit allocation,” says investment expert Pankaj Mathpal.

However, investments should only be made in well-rated deposits—AA and above. The New Companies Act 2013, which came into effect in April 2014, has made it mandatory for companies to get themselves rated in order to be eligible to raise money through fixed deposits.

Company quality

“Always check the group background and the business you are investing in,” says certified financial planner Kartik Jhaveri. Check the promoters’ history. Find out the company’s repayment record, its financials—losses, debts etc. A company with a low credit rating is likely to offer higher rates to woo investors. KCP has a negative rating, but is offering rates that are higher by more than 100 basis points (bps) compared to SBI deposits. Rates of the HDFC deposit scheme or ICICI Home Finance scheme, that have better ratings, are just 25-50 bps higher than SBI.






Liquidity

The lock-in period of a company deposit determines how liquid the product is, that is, how easily you can get your money back. Most deposit schemes have an initial lock-in of three to six months. HDFC deposit scheme, for instance, does not permit withdrawals for at least three months from the date of the deposit. In case of a withdrawal after three months but before six months, the deposit holder is paid a maximum interest of 4 per cent per annum.

If one wants to withdraw after six months, but before the date of maturity, the interest payable will be 1% lower than the interest applicable for the period for which the deposit has been maintained. If no rate has been specified for that period, then the interest will be 2% lower than the minimum rate at which the public deposits are accepted by HDFC. Additionally, HDFC says that the commission to its agents is paid up front for the entire period of the deposit. In case of a premature withdrawal, the commission is payable for the period completed and excess commission paid will be recovered from the deposit amount.

Interest payments

Company fixed deposit schemes can pay interest monthly, quarterly, annually, half-yearly and cumulatively. Those who need regular additional income—freelancers or retirees— can opt for periodic interest payments. However, benefits from fixed deposits with cumulative interest rates are considerably larger as the interest paid is ploughed back into the deposit account and the deposit holder benefits from compounding.