Now people have started investing in fixed deposits (FDs) as many corporates have raised interest rates by half a percent on their offerings.
A bunch of companies like Tata Motors, HDFC, Jaiprakash Industries and Hudco are currently raising money through FDs and offering interest rates of 9-12%, according the tenure. If investment advisors are to be trusted, FDs are being considered to be the best option by the investors because of the attractive rate of interest, as well as the current state of stock market.
Anil Chopra, CEO of Delhi-based Bajaj Capital pointed out, “There are no firms that compile data on the total money raised through companies’ fixed deposit schemes, but guesstimate is that the amount would double to around Rs 5,000 crore in 2008-09 as compared to 2007-08”. He added, “Company FDs became popular following the crash in equity markets. The demand began in mid-2008. The trend is similar to bank FDs that were offering higher interest rates”.
The companies that are able to raise money through fixed deposits can be categorized into three categories: manufacturing, non-banking finance and housing finance companies. As per rules manufacturing companies, can raise up to 25% of their net worth (share capital and free reserves). While NBFCs can raise up to one to three times of their net worth and housing finance companies are permitted a multiple of 10 times. In case of NBFCs and housing finance companies, a better credit rating bestow them the scope of raising higher amounts from the public. On the other hand manufacturing companies can’t accept deposits for over three years, whereas NBFCs can accept up to five years and HFCs can raise money up to seven years.
However, investment advisors tell investors to be careful about the tax implications before investing their money in company FDs.
An investment advisor cautions, “Don’t go by the rates, see how much you would earn after paying the taxes. For example, if you are in the higher tax bracket, your interest income would be charged at 30%. That would mean that you would earn around 8.5% even though the interest rate is 12%. Company FDs work best for people in the lower income bracket’’.
Investment experts also advise the investors not to compromise on the credit rating. Credit rating is not compulsory for manufacturing companies, whereas it is a must for NBFCs and HFCs. The investment consultant notified that “A lower-rated company may offer higher rates, but you should remember the risk involved in it. A lower-rated company can actually default on payment, including repaying the amount”. Chopra of Bajaj Capital says that people shouldn’t think that interest rate is higher for long-tenure deposit. He further says, “People feel that they earn higher rate if amount is locked in for a long period of time but that’s not the case. Some companies offer low rate for longer duration”.