Conservative investors have long considered bank FD schemes as safe investments. But, in a falling interest rate scenario, banks may be the first ones to slash deposit rates.

So, if falling bank deposit rates worry you, there are other options that you may consider for better returns. One option is fixed deposit schemes offered by NBFCs with a good track record, which offer superior rates.

A one-year deposit from the top-rated Sundaram Finance today offers 9.75 per cent interest.

Senior citizens are eligible to receive 0.5 per cent additional interest on their deposit. This is higher than the 9 per cent offered by Tamil Nadu Mercantile Bank, which is the highest among banks.

Interest rates

But, while making the choice, don’t just go by the interest rates. Unlike in the case of banks, you need to worry about pedigree and track record when choosing between NBFC deposits. FDs offered by NBFCs and other companies are unsecured. This means that in the event of the company going bust, there is a higher chance that you may not get back your money in full.

In contrast, any sum up to Rs 1 lakh deposited in a bank is backed by deposit insurance. Assuming that the bank becomes insolvent during the term of your deposit and is unable to repay the principal, the same can be recovered from the insurer to the extent of Rs 1 lakh.

So what do you need to keep in mind while choosing non-bank FDs?

First, given the importance of ensuring safety, check out the company’s financials. Check whether the company has been profitable for the last five years, whether its pre-tax profits comfortably cover (5 times or more) its interest payouts and its ratio of debt to equity (less than 2).

Credit rating

Second, check for the credit rating assigned to the FD you wish to invest in. It may be prudent to avoid instruments below investment grade. Instruments which are rated below FA by CRISIL may be avoided. Similarly, MB rating by ICRA for an FD scheme indicates moderate credit risk. Credit risk measures the probability of you not receiving the interest and principal on time.

According to rating agency CARE, instruments rated BBB and below carry a higher credit risk. Hence, investors may be better off staying away from deposit schemes, which don’t ensure adequate safety of principal.

Third, diversify across companies. While choosing between options, strike a balance between interest rates and the risks they carry. An attractive interest rate may not always mean high credit risk. For instance, Dewan Housing Finance’s FD carries a AA+ rating by CARE (implying high safety) and offers 10.25 per cent for a one-year time frame.

Similarly, Kerala Transport Development Finance’s FD which is guaranteed by the Kerala Government offers 10.25 per cent on its one-year term deposit. Sundaram BNP Paribas Home Finance, a subsidiary of Sundaram Finance, rated MAA+ (indicating high safety) by ICRA offers 9.75 per cent for an 18-month deposit. Allocation of funds across high yielding FD schemes with good ratings may help you maximise returns as well ensure reasonable safety.

>nalinakanthi.v@thehindu.co.in

Related Topics