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10% assured yield amid falling rates, dull equity return! Should you go for it?

You can’t time a market bottom. Worse still, even if you manage that, there is no guarantee you will be able to spot the stock that can ensure best appreciation of your money when the market bounces back.

Plus, in the uncertain world that we live in today, even a market rebound can’t ensure steady return.

Add to that falling interest rates, record high gold prices and stagnant real estate prices, it would look like we are going through worst time for wealth creation.

But there do exist pockets of opportunity; one is corporate fixed deposit schemes which are offering up to 10 per cent return.

And some of them are from big businesses like HDFC, Bajaj Finance, LIC Housing Finance and M&M Financial Services, where sturdiness of the business and reputation of promoters offer an added risk cover.

These companies are offering between 7 per cent and 9.25 per cent per annum on their corporate FDs. PNB Housing Finance and Shriram Transport Finance are also offering similar returns.

Kitchen appliances firm Hawkins Cookers on Monday announced one corporate deposit scheme, that promises 10 per cent return per annum and 10.50 per cent over 36 months. It will open on September 18.

The company has obtained MAA (Stable) rating from ICRA for the scheme, suggesting ‘high quality and low credit risk’. The company reported Rs 54.20 crore profit for FY19 against Rs 48.70 crore in the previous year. Net sales increased 17.28 per cent YoY to Rs 652.80 crore.

But like in any other asset class, higher return does mean higher risk, warns financial advisers.

“When you are getting higher returns, it means you are taking a higher risk. This means the company raising money at high rates may be not able to borrow from the market at a lower rate,” says Lovaii Navlakhi, Founder and Chief Executive Officer, International Money Matters.

“Your investment in such products should not be very large in proportion to the total portfolio. We do not recommend anything that promises above-normal return as it means you are taking above-normal risk. Investor exposure should not be more than one per cent of total portfolio in such schemes,” he said.

Corporate fixed deposits usually offer better returns compared with bank fixed deposits to draw savers. In a tight credit market, companies are trying to take advantage of current falling interest rate scenario to woo depositors with these schemes.

Corporate FDs are riskier than bank deposits, as the latter have provisional support from RBI in case of defaults, while a corporate deposit doesn’t have it.

The catch is, how do you choose the best corporate FDs? Credit ratings is one good indicator. An AAA-rated scheme would mean very negligible or no default risk, while the same would rise when ratings slip into a lower slab.

One should also check pre-closure options, penalties, track record of the issuer and the process involved before zeroing in on such a scheme.

Anil Rego, Founder and CEO of Right Horizons, says it is important to understand the creditworthiness of companies before investing in a corporate deposit scheme.

“The liquidity situation is tight now and many NBFCs are facing headwinds. We have seen enough defaults. One should be cautious before investing in high yielding fixed deposits. One should not put more than 1-2 per cent of overall amount in a corporate FD,” he said.

Some of the top NBFCs are currently in the market to raise such deposits. Bajaj Finance is offering 8 per cent interest rate per annum for one year and 8.75 per cent for three years. HDFC is offering 7.40 per cent on one-year fixed deposits for individuals putting in up to Rs 2 crore. PNB Housing is offering a similar return to investors for deposits up to Rs 5 crore.
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