Interest rates and other factors to consider before investing


The Reserve Bank of India (RBI) has hiked the repo rates twice in a row prompting many banks to raise their fixed deposit (FD) interest rates. Even after the increase in interest rates, if you still think that returns on FDs are not enough, you can consider deposits offered by companies. Senior citizens who need regular income to manage their monthly household expenses in addition to regular fixed deposits also bank upon these company fixed deposits (CFDs).

Company deposits are unsecured investments and carry relatively higher risk than bank FDs. Such CFDs are offered by manufacturing companies and non-banking finance companies (NBFCs) for varying tenures and with different frequency of interest payments. Banks FDs are currently offering about 6.70 percent to 7.25 per cent for tenures of 12-120 months, while many CFDs offer 8 percent and above for tenures of 12-60 months.

Features of company deposits
Although the rules governing the CFD are standard, their features may vary. Here are some important differences.

First, the minimum deposit amount may vary across tenures and companies. Some deposits may offer a higher rate of interest for a specific tenure but the minimum investment amount may be higher than the regular deposits.

Secondly, some of them may allow online investment in deposit, while most others will have only the offline mode of investment. Some online version may carry an additional rate of interest.

Thirdly, some of CFDs may carry additional incentive in case of renewal of deposits with them.

Fourthly, the CFD ratings across such deposits will vary. Some of them may be A, AA or even AAA rated. However, remember, the ratings may change over time and may not be the same during the currency of the tenure. Lastly, choose from cumulative deposits (where interest is payable at the time of maturity) or con-cumulative CFDs (where interest may be payable at monthly, quarterly, half-yearly or annual basis).

The risks are high
CFDs are probably the riskiest of all the fixed income products. This is because the risk of losing the principal is highest here. Although a CFD that comes with a high rating is recommended, the risk still remains high. Remember, a highly-rated CFD reflects relative safety but cannot assure it. It has been seen in the past that even highly rated CFDs have defaulted and unable to return principal and interest to depositors on time.

It is mandatory for all companies including NBFCs and those in the manufacturing sector to get rated before they can raise deposits from the public. The Companies Act, 2013 has to some extent made CFDs much safer under the Companies (Acceptance of Deposits) Rules, 2013. Also, provisions have been made for relatively sound companies having a net worth of not less than Rs 100 crore or a turnover of not less than Rs 500 crore to raise deposits from public.

Watchouts

If one is interested to invest in a CFD in spite of the risks involved, here are few tips:

  • Unlike bank deposits which are insured up to Rs 1 lakh, the CFDs are insured up to Rs 20,000. Restrict your investment to this amount in one company or slightly higher based on your risk appetite.
  • Stick with reputed names.
  • If the interest rate differential between a bank FD and CFD is slightly high, a six-month or 12-month deposit may be considered after taking into account the associated risks. Avoid locking-in funds for a longer tenure in them. Remember, higher the return, higher is the risk involved.
  • Stagger your investment across different tenures. Instead of locking in a lump sum in a fixed tenure, invest a portion for 1 year, some for 2 years, and some for 3 years. In a falling rate scenario, this helps in benefiting in terms of rates as it takes care of ‘reinvestment risk’ and also it helps in providing liquidity.

Taxation of company fixed deposits
The interest earned is fully taxable in the hands of the investor and is to be added to the ‘income from other sources’. If the amount of interest exceeds Rs 5,000 a year, tax at source is deducted by the company.

Here are few company fixed deposits on offer:

Click for interest rate of
Mahindra Finance’s Fixed Deposit

Effective from: 23 August 2018

Maximum yield: On an online cumulative deposit for 40 months, the effective yield comes to 9.71 percent per annum.

Features: One can make investment in both online and offline modes.

Online – Monthly, annual, cumulative; Additional FD Interest Rates for Senior Citizen 0.10%

Offline – Half-yearly, quarterly, cumulative; Senior Citizen additional 0.25% fixed deposit interest rate

Click for interest rate of
LIC Housing Finance

Effective from: 1st September, 2018 Maximum yield: On a cumulative deposit of 60 months, the effective yield comes to 7.85 percent per annum respectively.

Click for interest rate of
Bajaj Finance Fixed Deposits

Effective from: 5 June 2018

Maximum yield: On a cumulative deposit between 36-60 months, the effective yield comes to 8.40 percent per annum.

Features: + 0.35% for senior citizens and on renewal +0.25% over and above the rate of interest at which the deposit is booked.

Click for interest rate of
HDFC Fixed Deposits

Effective from: Effective August 24, 2018

Maximum yield: On a cumulative deposit between 33 months and 66 months, the effective yield comes to 8.10 percent per annum.

Features: Online deposits available.

Senior Citizens (60 years+) will be eligible for an additional 0.25% per annum on deposits.

Click here for interest rate of
Shriram City Union Finance

Effective from: 22 August 2018

Maximum yield: On a cumulative deposit between of 60 months, the effective yield comes to 10.42 percent per annum.

Features: Additional interest of 0.25 percent per annum on all Renewals, where the deposit has matured on or after 22 August 2018

Click here for interest rate of
Shriram Transport Finance Company

Effective from: 22 August 2018

Maximum yield: On a cumulative deposit between of 60 months, the effective yield comes to 10.42 percent per annum.

Features: Additional interest of 0.25% per annum on all Renewals, where the deposit is matured on or after 22nd August 2018

Click here for interest rate of
ICICI Home Finance

Effective from: June 25, 2018

Maximum yield: On a cumulative deposit between 48-60 months, the effective yield comes to 7.70 percent per annum.

Features: 0.25% additional interest for senior citizens

Click here for interest rate of
Sundaram Finance Company

Effective from: August 1, 2018

Maximum yield: On a cumulative deposit of 36 months, the effective yield comes to 8.63 percent per annum

Click here for interest rate of
Kerala Transport Development Finance Corporation

Effective from: 1st July, 2017

Features: Fixed deposits guaranteed by government of Kerala

Maximum yield: On a cumulative deposit of 60 months, the effective yield comes to 9.8 percent per annum.

Click here for interest rate of
Housing and Urban Development Corporation

Effective from: 10th July, 2018

Maximum yield: On a cumulative deposit for 12/24/36 months, the effective yield comes to 7.5 percent per annum.

Features: Tax benefit under Section 80C (2)(xvi)(a) of Income Tax Act, 1961 for deposits with a minimum lock in period of 5 years

0.25% additional interest rate for Senior Citizens in each rate slab.

Click here for interest rate of
DHFL

Maximum yield: On a cumulative deposit for 40 months, the effective yield comes to 8.75 percent per annum.

Features: Additional interest of 0.40% ; Additional interest of 0.15% on all renewals

Click here for interest rate of
PNB Housing

Maximum yield: On a cumulative deposit for 120 months, the effective yield comes to 12.09 percent per annum.



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