Money doesn’t grow on trees, but the right savings and investment plans can help it grow. The pandemic has triggered a lot of uncertainty and risk aversion in how we invest our hard-earned money. Many of us wish to shy away from high risk instruments or reduce our exposure to them while increasing our low risk investments. Debt instruments are considered safe and include bonds, bonds, certificates of deposit, debt funds, term deposits, etc.
Keeping your money in a bank is safe, but your savings account will only earn you 3.5%. One way to diversify your corpus is bank FDs and corporate FDs. Bank FDs offer a return of 5-5.5%, while corporate FDs generate higher returns while maintaining low levels of risk. A corporate FD is similar to a bank FD but gives you a better return with a lower risk. Since most instruments are rated, corporate term deposits have a high level of security. The companies offer returns of 7.5% to 8.5% for a deposit of 1 year to 5 years and 8 to 9% on a cumulative basis.
How do you choose the right company to invest in?
You have to consider 3 parameters:
Ratings: These term deposits are generally rated for their credibility by a few rating agencies, namely ICRA, CARE, CRISIL, etc. In general, companies with a rating of AA to AAA indicate moderate to high security of interest payments. As you move down the odds table, the degree of security decreases.
Kinship : When assessing the quality of the business, we need to take into account the likely support of a higher rated parent in times of distress. The number of years of existence and the standards of corporate governance of the Group. A strong parent can reassure the investor.
Interest rate : The best part of an FD business is the higher interest rate. The rates paid are comparatively much higher than what is paid for an average FD bank. It is important to check and compare the interest rates before opting for one. Some NBFCs and corporations offer higher interest rates than others for the same term. The reason why companies (or more precisely NBFCs) offer higher FD rates than banks is because NBFCs obtain higher returns from their lending activities than banks and are therefore able to pass them on to banks. depositors. At the same time, NBFCs ensure that their lending operations meet specified parameters and that the quality of assets is maintained.
However, some of the main risks to keep in mind when investing should not be overlooked. Make sure the company has paid regular interest to its shareholders. Company balance sheets have shown a consistent history of profits for at least 3 years. With the increase in the number of start-ups entering the market, make sure the business has been around for at least 5 years. Make sure they offer realistic returns (2-3% more than a bank FD).
Don’t fall prey to companies that offer very high returns, where the risk / return ratio is unrealistic. Make sure these companies are listed on the stock exchange, listed companies will be well regulated. Do not put all your eggs in 1 basket, diversify to limit your risks. Do not opt ââfor very long terms with lock-in, invest over 1 to 2 years and take stock of the performance of one-off payments annually. Don’t be fooled by misleading ads, always calculate the CAGR and compare it with others.
Finally, is the timing right for your investment? Choosing to invest when interest rates are high means your FD returns will be the highest, but also takes inflation into account. Systematically and periodically investing 10% of your income can be a good strategy in the early stages of your life and gradually increasing this ratio to 40% as you age can be a good long-term strategy. Ultimately, investing is investing your money now to get more of it in the future.
(By YS Chakravarti, Managing Director and CEO, Shriram City Union Finance)