Owing to the present market volatility, a lot of investors are looking at deposits. While fixed deposits (FDs) remain the most trusted instrument, there are some who look at company deposits (CDs), too. Like FDs, CDs give a specified rate of interest over a fixed tenor and usually offer slightly higher interest than FDs. However, with a higher rate comes higher risk. While in FDs, 1 lakh is insured by the bank, CDs carry company risk.

Among recent CDs floated in the market are those from real estate companies, many of them foraying into this instrument for the first time. CDs in themselves are seen as risky instruments and CDs from real estate companies raise more red flags given their drubbing in the 2008 downturn in view of the ongoing volatility. So what should you do?

Illustrations by Jayachandran/Mint

The risks

Sector risk: Investing in a CD from a real estate firm has its own limitations and risks.

Says Neeraj Bansal, director (financial services), KPMG, an advisory and consultancy firm, “Most big firms have launched these schemes. For real estate firms, these schemes do not form a significant portion of their total fund raised. However, for retail investors, it is important to understand that the real estate sector itself is not going through a good phase. Problems such as rising cost of raw materials, cost of labour, huge debt on the books and limited access to capital for construction have put real estate firms under pressure." He further said regional issues such as the recent Noida Extension land acquisition controversy, too, are problem areas.

Company risk: This is a risk that all CDs carry. And when it comes to real estate companies, the risk is even higher. Most real estate firms have huge debts on their books.

Says Shobhit Agarwal, director, Protiviti Consulting Pvt. Ltd, “The sector’s growth in the coming months will largely depend on the delivery of projects. However, with delay in project approvals, shortage of labour, the sector will have a tough time delivering the ongoing and announced projects. This will hit their (the companies’) revenue in the long run."

Since these are unsecured deposits, you have no rights on the assets of the company if it goes bankrupt. In case of bankruptcy, you get your money back when other secured lenders and preferential shareholders have been paid their dues.

What should you do?

If you want to add a CD to your portfolio, look for a stable company and a real estate company may not be the best choice. If you must invest in a real estate CD, you must weigh the risks and assess the company’s strength based on its debt and loan repayment capacity.

Says Bansal, “As there is high risk involved in the real estate sector, one should be very clear while investing in these. You should check company’s past three-year’s performance. You should check whether the company has paid its dues to its various lenders. Usually, in an investor’s portfolio, CDs should come after regular investment instruments such as mutual funds, FDs, provident fund and gold."

Look at the ratings. Says Varun Gupta, director, Ashiana Housing Ltd, a Delhi-based real estate firm, “Investors should only go for AAA or AA rated CDs. Look for only those schemes that have been rated by independent rating agencies such as CARE, Icra or Crisil."

Also, opt for a short term. “An investment period of one-three years will help you keep an eye on the company and its financials and the debt situation in the short term," says Arjun Puri, director, Puri Constructions Pvt. Ltd. Even if the company develops a sore spot, by the time it plays out, you would be out of the CD.