Tata Motors' recent fixed deposit scheme has put company FDs back in the limelight. After the lull for a long period, the space is
witnessing lots of action, with many of the top corporate conglomerates - such as, the Tatas, Birlas and the Godrej group, among others -lining up to raise funds
through FDs for their companies.
"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,'' says Anil Chopra, CEO, Bajaj Capital.
"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,'' says Sajag Sanghvi, a certified financial planner (CFP). For example, the Tata Motors' FD offers an interest rate of 11% for three-year deposits. The country's largest auto maker has approval to raise up to Rs 1,931.5 crore from the public through FDs.
The Tata Motors' FD offers 0.5% additional interest for senior citizens, employees and shareholders in Tata Motors. This also allows investors to buy a small lot of Tata Motors shares and avail of a higher rate on the fixed deposit. At the offered rate of 11%, compounded quarterly, the yield on the cumulative plan works out to over 12.8% for the three-year maturity period. The proceeds from the issue might be used to retire some of the bridge loans taken to acquire Jaguar Land Rover.
However, financial advisors say that investors must take a close look at their tax outgo before investing in these FDs. "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%,'' says Kartik Jhaveri, director, Transcened Consulting. "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%,'' he adds.
Sajag Sanghvi also feels the same. "I think investors should stick to their fixed deposits with nationalised banks. A reputed AAA-rated company would offer anything between 7% to 9%. But if you are taxed at a higher rate, you would be earning less than 6%,'' says Sanghvi. "Nationalised banks are offering attractive returns and the risk is also less there,'' he adds. This category of investors should look at alternative avenues like fixed maturity plans and other debt schemes from mutual funds.
Financial experts also advise investors that they should balance their return expectations with the credit rating of the instrument. "Investors should understand the concept behind rating. A higher rating indicates the capacity to repayment and also lower risk,'' says Jhaveri. "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 says.
Corporate FDs were preferred investment options for many individual investors till the mid-'90s, especially since interest rates on these instruments were administered and higher than many other alternative instruments in the market. After falling out of favour, especially after the rates were freed and interest rates dropped to single digit levels, FDs seem to have found a fresh lease of life with the credit crunch virtually freezing bank funding.