BOMBAY, 21 May — Ask any sane person, “where to invest?” and pat comes the reply, “in fixed deposits! That’s is the only investment avenue which will leave your capital intact!” The stock markets have become volatile, bullion is fast losing its shine, real estate might ensure a roof for your head but no bottom for your capital and the saga of Unit Trust of India and the Great Indian Mutual Fund scene continues to remain a tear jerking drama. So even if the RBI has reduced the rates of interest, fixed deposits, undoubtedly, continue to be the first choice of retail investors.
Historically instruments giving regular returns have been the primary investment choice for salaried class, professionals, retired people, widows not having regular income and individuals looking for assured returns with safety and liquidity.
Apart from bank deposits, company fixed deposits, bonds, debentures are currently the most favored investment instruments.
Agreed, these company fixed deposits (CFDs), too have had their share of scamsters and conmen, CRB Capital, Anubhav Group and many more are still fresh in the minds. But despite this, it has been observed that CFDs as an instrument has always been a favorite with investors. There are many companies which have sound fundamentals and are active in fixed deposit market. They are offering attractive returns to the investors along with reasonable safety.
Further, Reserve Bank of India has taken notice of defaults by NBFC’s and laid down stringent guidelines for raising of deposit. Only those companies which fulfill these guidelines are now allowed to raise deposit from public. Company deposits have always been favorable for investors looking for assured returns over short term period. And more importantly, they are the most simple and fastest mode of investing.
There is no demating, no haggling over commissions etc involved. One has to just fill up the CFD form and start earning interest from the day his money goes into the company’s account. Withdrawal of money is also simple. He has to just discharge his fixed deposit receipt at its back and send it to the company for repayment. On receipt of this the company will send him check/draft of maturity amount.
CFDs are preferred over bank deposits as bank deposit gives return in the range of 8 percent to 11 percent where as an investor gets a higher return of 12 percent to 14 percent on a deposit with a good company. But there are quite a few do’s and don’ts which one should follow while looking at CFDs as investment avenues. First and foremost, do not invest in companies which claim to pay a rate of interest higher than 15 percent. It is just not feasible in todays times. Also do not invest in companies which do not pay regular dividends to their shareholders.
Naturally, when a company cannot take care of the shareholders, how will it take care of the depositors. Do not invest on new companies belonging to first generation of promoters which have yet to prove their credit worthiness. There are just too many entrepreneurs around of which majority are a hoax and those genuine, will need time to prove themselves. Also avoid companies which are private limited or are partnerships or other un-incorporated bodies.
Such companies are under no obligation to publish their working results and it is, therefore, very difficult to judge their performance. Also do not invest in companies which have been showing accumulated losses in their balance sheets.
Last but not the least, avoid like plague, companies with a poor liquidity position and below investment grade rating. Investors should also avoid those companies which have below ‘A’ rating. In case of manufacturing companies, it’s however, not mandatory to get rated. In this case, investors should look at the background of promoters and financial track record.
In manufacturing companies, reputation and size of industrial group to which the company belongs is the key criteria for safety and reliability. And what you got to do before investing in CFDs is that you should look at these instruments from a short term point of view only, i.e., tenure should be for 6 months to 1 year only.
This will help investors to switch to other company if its performance is not upto the mark. Also another important fact is that manufacturing companies should be preferred as they offer 6 months deposit and the safety of investment is much higher here than that in NBFC’s. But that does not mean one should rule out non banking finance companies (NBFC’s).
Highly rated NBFC’s like Cholamandalam, First Leasing and Tata Finance have good financial track record and also a high rating. And the golden rule of investing in company deposits is that deposits should be spread over a large number of companies engaged in different industries. In this way an investor will be able to diversify his risk among various industries/companies. It is best that investors do not put more than 10 percent of their total portfolio in one particular company.
