"I bargain for the best deal."

"I need to earn more to improve my lifestyle."

"I have two job opportunities to choose from; which one will be the best for me?"

The human mind constantly seeks, creates, and evaluates options...

This ability makes us human beings special. But, there are always influencers that affect our decision making process. Sometimes, what you are convinced about may actually be disadvantageous to you. Interestingly, greed and fear are two forces that always volley at the back of our minds when making a decision. If we part ways with rationality, we may end up making wrong decisions.

Let's say, you want to borrow money. First, you'd understand why you want to borrow and then may decide from whom to borrow, depending on the rate of interest and attractiveness of the deals. Here, you want to save as much as possible. You expect zero-loan processing fees, the lowest possible interest rate, and lenient repayment conditions. Clearly, the driving force is fear. You don't want to lose money just because you couldn't get the best deal. You'd also keep an eye on the repayment schedule. The chances of making a wrong decision could arise when you pay too much attention to saving the interest cost, while ignoring the catch in repayment rules.

Now put yourself in the armchair of an investor. You are constantly on a lookout for incredible investment opportunities. You want to earn more profits, save taxes, and at the same time expect your capital to be secured. Here, the driving force is greed. More money.... (doesn't come free,)

By the time people realise this, they are already five feet underwater. When banks don't pay high interest on deposits, investors, who don't want to invest in risky assets such as equities and real estate, find it difficult to earn higher returns on their investment. This is when company fixed deposit schemes paying higher interest lure them. Many a times, investors end up investing in the fixed deposit of a company that is struggling with poor finances. Yes, payment of interest and repayment of principal is a commitment, but it could be broken; at times willfully, but most of the times, unwillingly.

In the present context

Glancing at the prevailing interest rates and overall credit conditions in the economy, the path looks slippery. Your greed may cripple your financial position unless you are careful and rein in your expectations.

The Reserve Bank of India (RBI) has been slashing policy rates, hinting at a lenient monetary policy stance. As a result, the interest earned on your fixed deposits has also fallen considerably over the last couple of years. Now if you are reluctant to invest in bank FDs and would like to explore options in the corporate FD space, you need to get your basics right.

Learn more

A 3-year deposit with a nationalised bank may earn you about 7.0% to 7.5% interest; large private sector banks may pay you an additional 0.25% to 0.30%. Foreign banks operating in India have been able to garner deposits at similar rates. Urban cooperative banks are offering slightly attractive rates upto 8.25% on a 3-year deposit. You will earn fairly less if you fall within the 30% tax slab or even in 20% tax slab. So, there are higher chances of many clients/investors considering other options.

Corporate FDs—a obvious one
A company FD with "AAA" or equivalent ratings is offering an interest rate of about 9.25% for a 3-year deposit, while those with "BBB-" and lower are pushed to offer as much as 12.5% interest to attract investors. In other words, if you want to invest for the tenure of three years; you have options that will fetch you upto 5.0% more, over and above what's offered by a nationalised bank.

Factors you should look at while selecting a corporate FD

• Credit profile
• Post tax rate of return
• Interest pay-out options
• Tenure
• Premature withdrawal
   

Given above are the bare minimum factors you must consider in your analysis but they don't form an exhaustive list. Once you are fairly sure about the credit quality and other terms of a fixed deposit scheme, you should try to analyse the performance of company.

You must consider the following

Quarterly profits over the last few quarters — higher operating profits may suggest that the core businesses of the company are generating cash

Low debt as compared to the net worth — if a company isn't over-leveraged it may be in a better position to honour the payment of interest and the repayment of loan on time.

Working capital conditions — a company might be asset rich but if it struggles to finance day-to-day activities, it may land up in trouble someday. Be wary of such companies.

Promotor's shareholding — if the promotor of a company that is collecting deposits from public at higher rate of interest and has already pledged the shares heavily, consider this a dangerous sign.

Things to remember

In short, you should invest in fixed deposits of companies that:

• Enjoy good credit rating;
• Generate new monies every quarter from its core business;
• Have manageable debt on their books;
• Have no problem with working capital, and the promoters of the company aren't forced to pledge their stake to raise money.
   

These checkers could act as a powerful matrix to weed out losers and keep the gems. Still have doubts? Good! Take a peek into cases where a company has defaulted on its loans; you would find that the company did not fit in, in at least one of the criteria given above.

The case of Amtek Auto is an eye opener. The fear of losing and greed of earning a few bucks more can cost you than a pretty penny. Why risk your hard-earned money for just a few percentages more? Best not be "penny wise, pound foolish."

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Comments

pandoba@hotmail.com Nov 17, 2015 Forgetting the lacunae created by one family backed government at the centre we are expecting miracles from Modi government which he is running at the centre for the first time unlike the family's almost continuous tenure of 50 or more years ! Isn't this a bit unfair ? That too his govt. has to face the rigid minority and Dalit vote banks  and an ever hostile media ! Tragic ! However , he wading through this opposition's cacaphony like a "GajaRaj walking on the Raj path when the barking street dogs runing along side !

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