Corporate FDs risky in demonetized era

The falling interest rates on bank fixed deposits (FDs) end up making corporate FDs look more attractive. But the risks of defaults increase as companies face turbulent economic conditions in the time of demonetization.

In a low interest-rate regime, the lure of corporate FDs is understandable. Currently, bank FDs offer less than 7% for one to three years but certain CRISIL - FAAA rated corporate FDs offer interest rates in the range of 8-8.5%.

Since both bank and corporate FD rates are likely to see further rate cuts, investors are tempted to lock their investments in at current interest rates in corporate or bank fixed deposits.

``One should have locked into the fixed deposits of banks already since the indications were clear that the interest rates are trending downwards. If not done as yet, people can still do so,’’ says Arnav Pandya, certified financial planner (CFP).

But he cautions against investing in corporate deposits. ``One should not lock in to fixed deposits of corporates unless one has a very high risk appetite,’’ says Pandya.

``When you invest in one company, then you are concentrating your risks as against investing in a mutual fund where the risks are diversified,’’ explains Hemant Rustagi, CEO, Wiseinvest Advisors.   

After all, as top-rated corporates lower their deposit rates, one would be left with the deposits of riskier companies.

The slowdown in the economy could affect the performance of corporates in the short term, leaving investors open to the risk of defaults. ``While the long term impacts (of demonetization) can be overwhelmingly positive, it does add uncertainty in the near term. The economy will probably take a couple of quarters to come back,’’ says PVK Mohan, head-equity, Principal Mutual Fund.

``For shorter time periods, usually shorter term debt funds or fixed deposits may be considered,’’ says Mohan.

``This is a poor time to enter fixed deposits,’’ feels Vidya Bala, head of mutual fund research, FundsIndia.

``For those looking to invest in debt funds across time frame - starting from liquid or ultra-short term (for shorter time frames) and short-term debt / dynamic bond / income funds for medium to long term, can be expected to comfortably beat the current savings/FD rates as the case may be,’’ adds Bala.

Many investors only look at the gross returns while deciding where to invest. Rustagi advises investors to keep an eye on the post-tax return.

The cash reserve ratio (CRR) hike is unlikely to arrest the downward slide of bank deposit rates. ``Bank deposit rates will continue to be low or fall further as a result of CRR hike. The steep fall in gilt yields will be a bit curtailed by the CRR requirement by RBI. However,  long-term debt fund investors and debt funds will likely score over FDs and corporate deposits,’’ says Bala.