CHENNAI: Fixed income investment has always been deemed as a safe mode of channeling one’s savings into the market. However, they have been gradually losing steam due to the popularity of mutual funds and other equity-linked schemes that promise higher returns for a shorter period of time.
Recently, the foray of many non-banking financial institutions and small finance banks into the economy has led to an explosive growth in the availability of financial products in the market. Corporate deposits and fixed deposits (FDs) offered by NBFCs have been gathering popularity due to the attractive interest rates they offer — nearly 100-200 basis points higher than the fixed income instruments offered by public sector banks.
However, corporate FD’s offer a higher rate of interest when compared to a state-run lender as the risk involved when depositing funds with a company is much higher than PSUs.“The risk situation will not be much different when it comes to taking FDs from NBFCs and small finance banks,” said Renu Maheshwari, a SEBI-certified financial advisor and CEO of Finscholarz Wealth Managers LLP. Some NBFCs which lend to a specified sector such as transport or a housing finance might face headwinds when the sector is going through turbulence, where investors or deposit holders might have no say in how the firm uses its assets.
“One thing that investors should understand when they put in funds in these companies is that they are unsecured deposits,” said Maheshwari.“There are two types of risks when it comes to investing in these deposit schemes. The default risk occurs when investors choose low-rated NBFCs, where they may not be able to pay back the investor at maturity,” she said.
“The interest risk occurs when companies who offer investment schemes are not able to manage their cash flow and in a turbulent period, the investor will not have a say in whether the company uses its assets to pay off the deposit holders or pay out as per the promised rate of interest within the stipulated time period,” the financial advisor added. One should be able to choose an NBFC with a higher credit rating of A-AAA and should also keep a close watch on the efficiency of the firm’s business model or rather opt for deposits with a short-term or medium-term duration.