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POSTED BY ON May 10, 2012 12:16 pm COMMENTS (5)
I was checking Moneycontrol.com and came across this Company desposits http://www.moneycontrol.com/fixed-income/company-deposits/ I was shocked to see their interest rates for deposits and wondering if they are true? Are they trustable for example Jaiprakash Associates Ltd is offering nearly 12.5% interest… If I want to apply to any one of these How do I do that ? Any insight of these would be great.. Thanks
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Dear Sudarshan, please do not look for ROI of 12.5% in isolation. Also keep an eye for the underlying risk as discussed by others. what ‘ll happen if at the time of maturity, you need that money badly & company is not in position to return your principal alone forget interest on it?
To invest or not to invest ‘ll be a personal call.
You may invest a small part of your over all portfolio in to such FDs.
Thanks
Ashal
Company Deposits are associated with an element of risk. Same is in the case of stock investment too. Know your risk apetite before investing.
Watch out for the ratings that is provided by rating agency. Choose company with good ratings. In case company defaults, you have no rights on asset of the company. this makes company deposits more riskly.
Sudarshan
I hope you are clear about the risk . Think of it like this
The companies can either take a loan from some bank at 16% per year or they can just issue fixed deposits like these and give 12.5% to Common man .
Now Issuing Fixed deposits are faster ,easiar way to generate cash with low interest rates (compared to what they would pay somewhere else)
So now they rasie this money for some project or some other thing . Now if at maturity , if they are not in position to pay off , whom will you catch ? The company might just get backrupt .
Imagine Satyam coming up with a FD and then they went bankrupt . These are the risks . But I am not saying that one should not invest . For good big size companies , one can invest some part , considering he is aware about the risk and ready to them it for higher returns !
Manish
Hi Sudharshan,
Interest rates offered by the companies is closely reflecting the credit risk which is associated with investing into the FDs of the respective issuing company. Higher the risk (owing to lower credibility), higher the interest rates offered by the Company. Reason being – trade off between risk taken on by an investor and the return from the investment.
Government of Indian bonds are considered Risk free and every other investment is benchmarked with these bonds.
The returns are taxable like any other interest income.
Regards
BanyanFA
The Govt bonds at 8% are guaranteed by the Govt of India. In the worst case Govt. can always print money and give it to bond holders (although the money value will fall). This Govt bond is usually called as RFR (Risk Free return)
Every other debt instrument will add a spread to the RFR because any private entity or even state government bonds are risky. Thus if a company enjoys very high credit rating – which means they have a very strong cashflow to pay back the bond interest and principal – such companies will provide only a small spread. (say 1%) so theie returns will be 9%.
More risky propositions will demand more credit spread. So someone who may have a lower rating (whose projects may be risky etc.) will need to pay additional spread to woo the customers.