A corporate usually approaches investors with Company Fixed Deposits (CFDs) when it is finding it difficult to source funds from its regular sources, such as bank loans or institutional money markets.
Therefore, an investor should be very sure of Do's & Don'ts while dabbling in them.
1. Select companies with AAA or at least AA credit rating, preferably with a short tenure of 2 years, to reduce risk.
2. Track its rating, redeem if it slips, even with a small foreclosure penalty.
3. Opt for high quality CFDs with a low rate, not vice versa.
4. Don’t go by the company’s established name, as even they default.
5. Split investment across 4-5 select companies to diversify the risk.
6. CFDs are unsecured borrowings and there is no recourse against the assets of the company in case of a default, even if owned by the government.
7. Their interest rates are higher than bank deposits of the same tenure due to greater risk of default.
8. They usually cannot be withdrawn before maturity, or there is penalty of lower interest / steep charges if allowed.
9. Interest payments get delayed, and for principal repayment companies may ask you to fill a redemption form, causing further delays.
10. These tactics increase your actual holding period, decreasing your effective interest rate.
11. Opt for secured Non-Convertible Debentures (NCDs) in the demat form and route the interest payments and refund of principal directly into the bank account linked to your demat account.
12. Another option is market-traded tax-free bonds with safety of capital instead of higher yields, if you are in the highest tax bracket.
13. NCDs are less riskier compared with CFDs.
14. Opt for secured NCDs which are secured against company's assets, so the risk is lower.
15. Invest in longer duration NCDs, for locking in at a high yield for a longer duration, and hold till maturity.
16. Though most NCDs are listed on stock exchanges and liquid, they are usually at a discount.
Therefore, an investor should be very sure of Do's & Don'ts while dabbling in them.
1. Select companies with AAA or at least AA credit rating, preferably with a short tenure of 2 years, to reduce risk.
2. Track its rating, redeem if it slips, even with a small foreclosure penalty.
3. Opt for high quality CFDs with a low rate, not vice versa.
4. Don’t go by the company’s established name, as even they default.
5. Split investment across 4-5 select companies to diversify the risk.
6. CFDs are unsecured borrowings and there is no recourse against the assets of the company in case of a default, even if owned by the government.
7. Their interest rates are higher than bank deposits of the same tenure due to greater risk of default.
8. They usually cannot be withdrawn before maturity, or there is penalty of lower interest / steep charges if allowed.
9. Interest payments get delayed, and for principal repayment companies may ask you to fill a redemption form, causing further delays.
10. These tactics increase your actual holding period, decreasing your effective interest rate.
11. Opt for secured Non-Convertible Debentures (NCDs) in the demat form and route the interest payments and refund of principal directly into the bank account linked to your demat account.
12. Another option is market-traded tax-free bonds with safety of capital instead of higher yields, if you are in the highest tax bracket.
13. NCDs are less riskier compared with CFDs.
14. Opt for secured NCDs which are secured against company's assets, so the risk is lower.
15. Invest in longer duration NCDs, for locking in at a high yield for a longer duration, and hold till maturity.
16. Though most NCDs are listed on stock exchanges and liquid, they are usually at a discount.