Should you invest in Corporate Fixed Deposits?

High inflation, which has turned the real returns from bank fixed deposits into negative, has made Corporate Fixed Deposits (FDs) an attractive investment option. Typically a corporate fixed deposit offers higher return than a bank FD, but of course it comes with relatively higher risk tag. This is because corporate deposits are unsecured in nature and unlike bank fixed deposit it is not covered by a guarantee from the Deposit Insurance and Credit Guarantee Corporation of India, which assures a repayment of Rs 1,00,000 in case the bank defaults. However, for high-networth individuals, this may mean little as for investments that runs in millions, a safety of Rs 1 lac from banks will not make any remarkable difference to affect their investment decision.

In the past (1990’s), there have been instances wherein companies like Panjon Pharma, CRB Capital, Morpan Laboratories (issued equity share in lieu of Fixed Deposit) offered high returns but defaulted. However, that does not make corporate fixed deposits a bad avenue to park your funds. Just like any other investment, before you make an investment you need to study the company, the credit rating and other parameters, then make an informed decision and select the right company for investing in fixed deposits.

How to choose the right corporate fixed deposit for investment?

Many companies’ offerings are available for fixed deposits, so you need to look through the key parameters to choose the right corporate FD for investment. Here we have listed 7 key parameters to evaluate a Corporate Fixed Deposit:

1. The issuer company should have a strong goodwill and track record in the market and should be running its business from at least 15- 20 years.

2. Only invest in FDs of companies have been earning profit and have a continuous dividend paying track record of at least last 5 consecutive years.

3. Credit rating is one of the important parameters while selecting corporate fixed deposit. The NBFCs that offer corporate fixed deposit has to get themselves rated by the rating agencies such as CARE, CRISIL, ICRA etc., but manufacturing firms have no such compulsion. The better the rating of the FD, the safer it is to invest as the risk of default is the lowest. While a low rated FD will be risky, the company will offset the risk by offering a higher yield to the investors. As a thumb rule, investors should invest only in a company having AAA or AA rating or above. Even within a given rating, choose a company that has a better reputation and operates in a stable industry.

Fixed deposits of certain companies are not rated, in such cases one should deeply study financial statements of the company before making the investment in their FDs. If you are not able to understand financial statement then you can take help of financial advisor or avoid investment in unrated companies.

4. The sector outlook in which company runs its business should be positive. Avoid troubled or high risk sectors like real estate or microfinance.

5. One should avoid company which is offering unusually high interest rates because generally companies offer higher interest rate to compensate high risk.

6. Avoid companies that have high debt, it poses higher risk to your investment. If anything goes wrong, the company may face problem in repaying its debt if it is already highly leveraged. Pay a closer look at the balance sheet debt (loans secured and unsecured) of the Company. Its a red flag if this sum is more than twice the net worth (capital + reserves and surplus). Avoid such companies.

7. Check the history of the company, how they have paid the principal and interest to the investors.

Once you have selected the Corporate FD for investment, avoid committing for a longer tenor. Choose a FD with a tenure of not more than 36 months, as it is difficult to predict the future of a business beyond this period.

If you need help in selecting the right corporate FD or are confused, take help of Arihant’s investment advisor.

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Understanding the Ratings

Credit rating is your most important deciding factor while selecting a fixed deposit. Understanding different ratings can be difficult for a layman as they may not be well-versed with various jargons and rating numbers.

What does a “CARE AAA” or a “CRISIL FC” indicate? These terms may look confusing, here we have de-jargoned the key ratings from India’s two leading rating agencies: CARE and CRISIL. The ratings are listed in descending order, where AAA is the best rating while D is the worst.

Fixed Deposit Rating CARE

Fixed Deposit Rating CRISIL

Note:  1) CRISIL may apply ‘+’ (plus) or ‘-‘ (minus) signs for ratings from FAA to FC to indicate the relative position within the rating category.

Here is a list of few ongoing corporate FDs (Feb 2014)

To invest in corporate fixed deposits or know about them SMS <Arihant> to 56677 or email us at contactus@arihantcapital.com