The fixed deposit space in the industry is gaining some attention as top coporates are raising funds for their companies through the FD window. Recently Tata Motors has introduced a fixed deposit scheme where by an interest rate of 11% is offered for deposits parked for three years and the firm has a sanction to raise up to Rs 1,931.5 crore from the public.
Sajag Sanghvi, a certified financial planner (CFP) said, "Companies are increasingly looking at this route because of the recent liquidity crunch in the market. Investors are also interested in them because companies are offering good interest rates."
Bajaj Capital's CEO, Anil Chopra says, "Rough estimates indicate that companies are raising around Rs 200-250 crore every month this year, against Rs 100 crore a month last year, though there is no agency to compile the quantum of funds raised by companies through this route."
The Tata Motors' FD which offers a rate of 11%, compounded quarterly yields over 12.8% for the three-year maturity period on a cumulative basis. Also the FD offers an additional 50 basis points interest to the senior citizens, employees and shareholders in Tata Motors. All this attract the investors to buy some shares of Tata Motors and thereby avail the benefits of higher rate on the FD.
However, financial advisors say that investors must look at their tax brackets before investing in such FDs. Director of Transcened Consulting, Kartik Jhaveri says, "It is advisable for people with very low income. For example, it works out best for people with income of below Rs 3 lakh or people earning below Rs 5 lakh where they are taxed at 20%. But it is not at all suited for high net worth clients or people in the higher tax bracket, as the interest income would be charged at a rate of 30%."
Even Sajag Sanghvi agrees to this view and said, "I think investors should stick to their fixed deposits with nationalized banks. A reputed AAA-rated company would offer anything between 7% and 9%. But if you are taxed at a higher rate, you would be earning less than 6%. Nationalized banks are offering attractive returns and the risk is also less there."
He however advises that investors should look at alternative options such as fixed maturity plans and other debt schemes from mutual funds. In fact investors should also balance between their return expectations and credit rating of the instrument. Jhaveri says, "Investors should understand the concept behind rating. A higher rating indicates the capacity to repayment and also lower risk."
"You may get better interest rate in a lower-rated FD, but there is no guarantee that you would get your capital back after a few years," says Sanghvi. "What is the point of earning better interest when there is no guarantee of return of capital? Investors should be aware of this since point since defaults can happen in the current environment even in India," he added.