HDFC: safety and security
Sep 05, 2000

Author: PersonalFN Content & Research Team

With interest rates inching upwards, most investors are finding short-term instruments a better investment option vis-à-vis long-term instruments. Currently if one looks at the fixed deposit segment, HDFC comes across as a favoured product as compared to the existing FD instruments currently available in the market.

HDFC's on-tap fixed deposit program offers 9%, 9.5% and 9.75% for one, two and three year maturity profile under the monthly income plan and 10% for five-year period. Under the cumulative and non-cumulative plans, the rates offered are 9%, 9.5% and 10% for one two and three years respectively and 10.25% for five years.

It definitely makes better sense for risk averse investors to avoid blocking funds in a five-year instrument offering 10.25%. Parking funds in a 10% instrument for three years maybe better than chasing the incremental 0.25 percentage points as the market is currently finding it slightly difficult to take a view on the interest rate movements.

Although the rates on offer may seem to be on the lower side, investments in the FD program of HDFC are eligible for the benefits under section 80L. On the fixed deposit instrument, the housing finance bigwig offers capital gains tax exemption under section 54EB of the Income Tax Act 1961 and wealth tax exemption. The instrument also offers investors loan against deposit after three months from the date pf deposit up to 75% of the deposit amount. Interest charged on such loan will be 2% above the deposit rate.

After factoring in the tax element, the effective rates earned would be higher than deposits that are not entitled to this benefit. On the safety side investors should not worry as the housing finance major has shown steady growth over the years and the quality of its asset is quite high. The good management quality should definitely give a much needed comfort level to investors. However looking at the volatile interest rate movements, it would make better sense for investors to space out investments over the next 12 months to take advantage of any small upside moves on interest rates.

For the current fiscal, HDFC plans to mop up over Rs 10 bn through fixed deposit instrument,slightly higher as compared to last year's mop-up. Last year, the housing finance corporation mopped up over Rs 63 bn. This year it wants to take this figure to Rs 73 bn.