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Vet risks attached to company deposits, advisers tell investors

Vet risks attached to company deposits, advisers tell investors
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First Published: Thu, Aug 13 2009. 01 15 AM IST

Graphics by Paras Jain / Mint
Graphics by Paras Jain / Mint
Updated: Thu, Aug 13 2009. 10 56 AM IST
New Delhi: Firms planning to raise short-term capital are paying higher interest rates on their deposits than banks’ fixed deposits to attract retail investors. Despite the superior returns, investors should also understand the risks attached to company deposits, financial planners warn.
Graphics by Paras Jain / Mint
Banks raised their one-year deposit rates to 10.5% in September 2008. However, bank deposit rates have since come down to 6.5-8% for one-year deposits, compared with 7.25-11% returns from company deposits. “You have lots of company deposits floating in the market because interest rates may go down in future,” said Surya Bhatia, a New Delhi-based financial planner. “It’s a good option for small investors, but one has to determine (the) risk-reward ratio.”
Bhatia said that before investing in such deposits, an investor should look at their credit ratings and the issuer’s debt-equity ratio. Currently, around 40 company deposits are on offer.
“Company deposits are an alternative source of investment and give additional returns. However, taxation is not so efficient for company deposits, which are taxable at marginal rates,” said Himanshu Kohli, a founding partner of Client Associates, a Gurgaon-based private wealth management company. So, an investor in the higher tax bracket will find his company deposits taxed at 30%.
Company deposits are mostly exercised by firms after they have exhausted their bank limits.
Mint reported on 4 August that companies led by state-owned oil firms are negotiating hard with banks for cheap money. Such firms have also made a strategic shift in their borrowing plans. Instead of going for one-year working capital loans, they are borrowing for three months and rolling over the facility.
The prime lending rates of public sector banks—the rate at which they lend to their best customers—are between 11% and 12.75%. However, short-term rates are not linked to the prime rate and anything above 3.25% seems to be acceptable to banks for such loans as they need to cut their own cost.
“Today, when the equity market is not so lucrative and after (the) credit crisis, when banks have concerns about how much to lend, companies exercise other options when they have exhausted their bank limit,” said Kohli.
D.K. Aggarwal, director of SMC Investment Solutions and Services, said, “Currently, when interest rates are going down and not many investment opportunities are available for customers, deposits of good companies are good options.”
An investment decision should be taken depending on an investor’s interest rate outlook. It is preferable to go for shorter-term fixed deposits because in the longer term, the chances of going wrong are more, said Bhatia.
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First Published: Thu, Aug 13 2009. 01 15 AM IST