Corporate FDs - Risk v/s Return Aug 07, 2009

Corporate FDs - Risk v/s Return

Aug 7, 2009

Weekly Facts
	Close	Change	%Change
BSE Sensex	15,514.0	126.1	0.8%
Re/US$	47.7	0.7	1.4%
Gold Rs/10g	14,945.0	220.0	1.5%
Crude ($/barrel)	75.1	8.0	11.9%
FD Rates (1-Yr)	5.75% - 7.25%

Weekly change as onAug 6, 2009

Corporate FDs - Risk v/s Return

Impact

Jindal Steel & Power Ltd. (JSPL, annual turnover of Rs 10,000 cr.), a part of the Jindal Group is a leading player in the steel & power sector. JSPL is offering Fixed Deposit Schemes (FD) with Cumulative and Non-Cumulative options. The tenure is 12, 24 and 36 months. The interest rates corresponding to the tenure are 8.00%, 8.25% and 8.50% p.a. The minimum deposit amount is Rs 10,000. The interest on the Cumulative FD is compounded quarterly resulting in an effective yield of 9.57% p.a. on 36-month tenure.

Another well-known corporate entity, Godrej Industries Ltd. (GIL), a part of the Godrej Group and a leading manufacturer of vegetable oils and chemicals is offering similar Fixed Deposit Schemes with Cumulative and Non-Cumulative options. The tenure is 13, 24 and 36 months and the interest rate is 7.50%, 8.00% and 8.50% p.a. respectively. The minimum deposit amount is Rs 10,000.

The interest amount is subject to deduction of tax at source (TDS).

Debt to Equity Ratio (D/E)
	JSPL	GIL
As on Mar 31, 2008	1.03	0.41
As on Mar 31, 2007	1.40	1.14

The Debt - Equity ratio compares the company's total debt to its total shareholders' equity. This highlights how much creditors have committed to the company vis-à-vis how much shareholders have committed. Ratio of more than 1 indicates risk.

The rates offered by these corporate FDs are better than the Bank FDs. However, the risk is higher in Corporate FDs. Investing in them would depend upon the risk profile of the individual.

MFs tighten the exit route

Impact

In an apparent move to counter the No-Entry load rule, which became effective from August 1, many fund houses have increased the exit load and the tenure for the inapplicability of exit load to 3 years. This means an investor will have to stay invested in mutual funds for 3 years if he wishes to avoid paying exit load. Earlier the exit loads were applicable if the investor redeemed within a year.

This move can impact investors in two ways. One, this will prompt them to stay invested for a long haul, which is important while making equity-oriented investments.

Two, they should continue to be careful as their distributor can coax them to churn their portfolio too often, in order to earn commission through exit load. Distributors are entitled to receive a maximum exit load of 1%.

In our view, investors should always choose a fund, which is capable of fulfilling their financial goals and suits their risk profile. Then they should stay invested in the fund as long as they serve that purpose.

Realty check

Impact

As real estate prices are still low and banks are offering home loans at lower rates, there could be a rush by individuals to buy a house.

Before purchasing a house, here is a quick reality check:

Clarify with your builder, if he is quoting you the rate on built-up area or the carpet area. Carpet area is the area one can use or simply, the area where one can put a carpet. The built-up area is the carpet area plus the area of the walls and pillars.

Check the Infrastructure around the house, such as the distance between your house and railway station, bus depot, market, hospital etc.

Check the maintenance charges. Your capacity to pay them along with the loan EMI should be established before you take the final decision.

Check the Preferential Location Charge (PLC). Builders charge this if you want a specific flat or parking space, for example, one facing the pool or the garden. Nowadays, every house is either facing a pool or a garden. Hence, builders charge this to every buyer.

MFs soon to be traded like shares

The Mutual Fund (MF) industry seems to be in the reform mode. After No-Entry load, SEBI has mooted a proposal to AMFI (Association of Mutual Funds of India) to set up a trading and distribution platform to bring it on par with shares. A few large interested parties have submitted their bids for establishing the platform.

With this, investors will soon be able to buy and sell MF units just the same way as shares are transacted. All this would be done through a single online window. They would also be able to view their portfolios and compare performances across fund houses and schemes. This online facility would come at a fee which has not yet been determined.

This fee-based online service would help fund houses cut their distribution and marketing expenses which would lead to lower expenses and higher returns for investors. This will also increase the reach of mutual funds to smaller towns with ease.

(the stock markets have doubled since March 2009) and he fears that an asset bubble may be in the making in real estate and the stock market.

Mortality charges may not be capped

Insurance companies are lobbying for the removal of mortality charges from the overall cap on charges on ULIPs. IRDA had fixed the overall cap on charges on ULIP, which would be effective from October 1, 2009. The difference between the gross and net returns of the policy has been fixed at 3% incase of insurance contracts less than and equal to 10 years and 2.25% incase of insurance contracts more than 10 years.

Mortality charge is a monthly charge and it varies depending upon the age, gender, health and sum assured. As the age increase, the mortality charge increases. This might discourage insurers from offering insurance cover to individuals in higher age group.

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