As frontline shares struggle for direction and the spectacular rise in second-line shares begin to look unsustainable, corporate fixed deposits (FDs) seem to be finding more takers among retail investors. Brokers and investment advisors are recommending corporate FDs to their clients seeking returns higher than a bank fixed deposit, but who lack the stomach for risk associated with equities.
Many companies are offering double-digit interest rates in some cases almost twice of what bank FDs offer underscoring the difficulty of lesser known companies to raise capital. Market observers say a key reason for the weak credit off take in the system is that banks are still choosy about whom they lend to.
Experts tracking interest rates say rates offered by some of the companies have fallen 100-300 basis points over the past six months. Still, the rates continue to be higher than what bank FDs offer. Brokers, however, caution that higher returns on corporate FDs come at a cost of higher risk.
These are unsecured instruments. So, people who want to take advantage of the reward should understand the risk.
If somebody wants to invest a big amount, say more than Rs 5 lakh, it is prudent to diversify this among different companies rather than putting everything into one basket.
While the credit situation has improved considerably over the past 6-9 months, lenders are seeking higher rates from companies that appear more vulnerable in the event of the economy slowing down again.
Some of the well-known companies that are currently offering returns on their FDs in excess of 10% for different investment horizons. India’s largest bank, State Bank of India, currently offers 5.25% interest on deposits ranging between 181 days and less than one year. For the period between one year and less than two years, it offers 6%, while deposits for a duration of two years to less than three years will fetch a return of 6.5%. While some companies are offering reasonably good returns, the risk involved is higher than bank deposits.
Corporate FD schemes typically target conventional savers, retirees and pensioners. Though companies are offering better returns than bank deposits, wealth managers say checking the fundamentals and credit ratings of the company are very important. Fixed deposit schemes launched by finance companies such as Canfin Homes, HDFC, DHFL, Exim Bank, ICICI Home Finance and LIC Housing Finance, among others, are mostly offering around 6-8% over a 1-3-year horizon.
Over three dozen such companies are currently raising funds through FDs. There are AAA and AA companies offering returns of 7-9% and others at 10-12%.
Investors should invest based on their risk appetite. Some portion can be invested in fixed return schemes as part of their asset allocation.
Tax is applicable only when interest credited to fixed deposits as per CBDT. No income tax at source will be deducted if banks have only made a provision for interest on fixed deposits and not actually paid it
to the depositor.
Until now, tax was supposed to be deducted by banks even if only provisioning was made for interest payment.
However, this was creating problems for banks using Core-Branch Banking Solutions (CBS), which enables customers to access their accounts from any branch.
The Indian Banks’ Association in a representation to the Income Tax department had said that for banks using the CBS software, interest payable on fixed deposits is calculated generally on a daily or a monthly basis but is parked in the provisioning account for monitoring only.
The interest is actually credited to the depositor’s account either at the end of the financial year or at periodic intervals or on maturity of the deposits.
CBDT clarified that since no credit is given to the depositors while calculating interest on fixed deposits on daily or monthly basis in the CBS software used by banks, tax need not be deducted at source on such provisioning of interest.