Company deposits gain favour with the larger public as they with a risk element attached to them manage to provide higher returns to their investors. But, in the wake of recent rating downgrades for most of the debt instruments and after DHFL stopped mobilization of fresh deposits and even postponed earlier redemption barring withdrawal due to medical exigency; company fixed deposits are in the spotlight once again.
So, here is a quick take on whether or not you should be investing in the instrument and if you still be keen to deploy your money into the avenue, what precautions you should exercise:
Once in a while, glance at the financial health of the company in which you have maintained deposits:
Over a period of time, like with other things, the financial health of concern can either gain or deteriorate for any of the possible reason. And as an investor, it makes due sense to gauge the likely percolating risk in the company that you need to avoid and hence go in for premature withdrawal or redemption from the instrument.
There have been instances when due to the economic slowdown and other probable factors, companies have either defaulted or postponed principal and interest payments on such company FDs.
In debt instruments, the prime purpose of capital protection should be given precedence:
Investors in a bid to get higher return should not sway and keep the prime focus area of debt instrument i.e. capital protection in mind and thus should avoid options in the debt basket that is fraught with higher risk.
Companies luring by providing anything over and above 2-3% for company deposits in comparison to bank deposits of a similar tenure are highly risky, so better avoid them.
Credit rating is a must to review time and again:
Go for historical performance and past record of the company in terms of whether it was able to serve with principal and interest payments on time or not. To further know the credibility, you can rely on the credit rating on these instruments by rating agencies and avoid company deposits with ratings below AA.
Typical tenure for you as an investor should not be over 5 years:
As with NCDs where it is difficult to determine which way interest rate trajectory would go, here in the case of company deposits, the financial health of a concern can be a question mark and there can be a wrong forecast made for beyond 5 years. So, when betting on company deposits, remember to stick to 5 years or less tenure.