Jul 25, 2009

Do you have risk appetite for corporate fixed deposits?

Shriram Transport Finance Company Limited (STFC), a player in commercial vehicle finance, is offering fixed deposits at attractive rates. As depicted in the graph below, the rates offered by this company are more than the bank rates by 2% - 4%. What makes this even better is that the cumulative fixed deposit scheme is compounded quarterly. For example, if you invest Rs 25,000 for 1 year @ 9% p. a. compounded quarterly, the maturity value of your investment would be Rs 27,325 and the effective rate will be 9.3% p.a. Whereas Rs 25,000 invested in HDFC bank for a year will fetch you Rs 26,469; a difference of Rs 856.

However, bank FDs are less risky than corporate FDs. The ability of the company to service these deposits depends on its ability to generate cash flows which in turn depends upon various factors like the nature of its business, demand for its products, competition in the industry it operates, which involves analyzing and forecasting the company's financials. If the company faces financial difficulties it will find it difficult to service these deposits. Hence, investing in this FD would depend on the investor's risk-appetite.

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