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Looking beyond FDs Author: Fintuned | Date: May 18, 2014


According to the new Companies Act, companies looking to raise public deposits need to get themselves compulsorily rated on liquidity and ability to pay deposits on due date from a recognised credit rating agency. Such a rating will denote how risky a particular deposit is, which investors tend to overlook.  This is the reason why manufacturing and real estate companies of late have stopped accepting or renewing fixed deposits from April after the new Companies Act came into force.

So investors should start looking for alternative options to invest when their FDs mature and they get their money back.  Industry experts says investors ac look at: NBFCs, Bank FDs, NCDs, or fixed maturity plans (FMPs) of mutual funds as an alternative.  While FDs are easy to understand, other alternatives are not as liquid as FDs. So investors first must understand how the product works before putting money there in.

Availability of options

NBFCs collection has already started growing up as they come with a more secure option.  NBFCs are unaffected by the Companies Act and they can continue raising deposits. They give interest rates of 8.5 % to 10.5 % and come with an AAA or AA+ rating.  Debt investors looking for higher returns can go for non-convertible debentures (NCDs) of NBFCs. They come with tenure ranging from 400 days to 6 years. Interest rates range between 11% and 12.5%, which are 1.5-2.5% more than the rates offered by bank deposits. They also offer you the option of monthly interest, annual interest, cumulative option as well as option to double your money.

Investors can also consider FMPs. FMPs aim to generate a steady return over a fixed tenure, typically from a month to three years, and are similar to bank fixed deposits. They protect an investor from interest rate volatility by investing in fixed securities. Investors can expect a return of around 9-9.1% on a one-year and one-day FMP and 9-9.25% on a three-year FMP.

Taxation and liquidity standpoint

It is important to calculate your post-tax returns before taking an investment decision.  If you are in the higher tax brackets, FMPs would give you higher returns than NBFC deposits or bank deposits. For example, you get 10 % on a three-year corporate FD. However, your net return would be only 7% if you are in the 30% tax slab.  Compared to this, a three-year FMP would give you a return of 9%.

Liquidity is another important aspect which investors need to consider. FMPs, though listed on the Stock Exchange, are illiquid and typically the investor has to hold the investment till maturity. In contrast to a NCD, FD can’t be sold in the market. You can easily sell NCD in secondary market whenever you plan to move out.

To summarize, investors apart from alluring interest rates, should also consider investment size, credit rating, credibility, tax efficiency and liquidity aspects of the product before investing their money into it.

Any thoughts/opinions, please mention in the comments below!
Cheers 🙂

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy of any agency, organization, employer, or any company. Fintuned Co. LLP shall not be held responsible in any manner whatsover, for any decision/action taken by readers on the basis of the content mentioned in the article. Readers are requested to exercise their best judgement before taking any decision/action. Fintuned Co. LLP shall also not be held responsible for any copyright infringement committed by the author in the process of writing and/or publishing this article and in the event any such offence is found, cooperate with necessary authorities to take remedial action


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