Company FDs - new safe haven?

Mon, 25 Mar Pre-Open

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Recently, the Reserve Bank of India (RBI) decided to cut the benchmark repo rate by 0.25%. This would lead banks to lower the rates that they offer on their deposits. And it will come as a blow to those savers who were parking their additional funds in bank fixed deposits (FDs).

Till not so long ago, all banks were offering attractive rates of interests on the FDs. This lured a lot of savers to take up the schemes. And since the returns were almost risk free, it added to their attractiveness. But now, with interest rates being lowered, savers would start looking at different avenues. One avenue is obviously gold for its safe haven status and high returns. But as per Economic Times, there is another investment area that has caught the fancy of financial advisors. These are FDs offered by high quality companies.

Some of these companies are offering interest rates as high as 10.75%. They are termed as high quality companies due to their strong fundamentals as well as reputed managements. Therefore the perception would be that the interest earned on these deposits is almost risk free. However, one has to remember that when it comes to investing and saving, it is best not to assume things.

While some companies are safe, the others may not be. Attractive rates of interests are also being offered by many small cap and mid cap firms. These companies are trying to compensate investors for the additional risk involved in the smaller size by offering higher interest rates. That is higher as compared to their larger peers. But unfortunately the risks associated with these companies are higher too. Investors therefore need to be careful when it comes to putting their funds with such companies. If fundamentals or business conditions deteriorate rapidly - something that happens during tough times - investors could lose their money as well. Leave alone the higher interest rates, during such times investors may end up losing their entire principal as well!

In addition to this there is also the factor of taxation that needs to be taken into account. Unlike long term bank FDs that offer tax benefits, company FDs do not always provide such benefits. However, the tenure for holding is similar to that of the long term bank FDs. Therefore in many cases, the tax adjusted interest rate may be similar to what one gets in a bank FD.

Therefore investors would do well to delve deeper into these things before going ahead and investing in company FDs. They need to understand what the tax adjusted returns would be. In addition to this, studying the company's fundamentals and financials is very important too.