Investing in risky assets is not a wise proposition if you don’t have time and mental bent for research. Normally investors who invest in risky assets like stocks and derivatives have very high return expectations. In real sense sometimes these expectations are highly unrealistic which leads to the fall of a larger percentage of risk loving investors. If stock market has given a historical return of 15 to 20% expecting 40% return out of it on continuous basis should be categorized as highly unrealistic.

So if you are risk averse and don’t have enough knowledge and time and you want return in the range of 8 to 15% (15% return is quite competitive with respect to stock market returns) what are the options available with you? If you are willing to roll your sleeves up and do a little bit of analysis, Company Fixed Deposits can prove good alternative for you.

What are Company Fixed Deposits?

Company fixed deposits are similar to the famous Bank deposits but in this case deposits are managed by a corporate firm which is not a bank. It can be a NBFC, listed public limited company or private firm. The main difference between a Banks Fixed Deposit and Company Fixed Deposit is the loan guarantee of up to Rs 1 lakh given by RBI against Bank Fixed Deposits. Company Fixed Deposits are not secured by RBI and hence they are risky as compared to Bank Deposits.

Pros and Cons of Company Fixed Deposits

Risk Analysis

Company Fixed Deposits are exposed to default risk as at maturity company might not be in a position to repay the accrued amount. There might be various reasons like bankruptcy, fraud, cash crunch due to loss etc. These loans are not secured by RBI as done for Bank Deposits so investors do not have insurance of even Rs 1 Lakh.

Who Should Invest

As there is a default risk involved and these deposits sound risky before you plan to invest you need to take out some time for research. It’s not that you reject this option as a whole but do some analysis to find out the good option as the effort is worth it (you will get superior returns 11 to 14%). Please find below some of the checks which you should apply before choosing a company fixed deposit:

1. 1.Company deposit rating by rating agency like ICRA, CRISIL etc
2. 2.Financial health of the company – Profit, Debt, EPS etc should be in good shape.
3. 3.Dividend Payout history of the company – It should have a healthy history of dividend payments
4. 4.Promoters History
5. 5.Companies Management capability
6. 6.Overpromising rates – People should avoid deposits which are offering return above 15%

Investment Option - Shriram Transport Finance Fixed Deposits

Key Highlights

Analysis and Recommendation

Let’s analyze the issue based on parameters suggested in WHO SHOULD INVEST section above -

Company's net profit margin is very good at 22.65% in 2011 and it has consistently increased its margin in last 5 years. This essentially means the company has enough resources to pay the depositors the promised interest on fixed deposit. CRISIL has also rated it FAA+ which stands for stable and hence the company can be relied to pay its obligation. It has consistently increased its revenue over last 5 years at CAGR of 40% with net profit increasing at 60% CAGR in last 5 years. The company has done wonderful in operating efficiency and has consistently been able to post better margins. The company has paid dividend consistently over last couple of years. Though the dividend yield is not impressive, It stands at 1.5% at the amount of Rs 444.95. As far as quarterly results are concerned, the growth is not impressive at all. This is because of low economic sentiments in Indian market and high interest rate which has impacted the loan growth of all the financial institutions. The net profit and revenue have almost remained flat in last 5 years. The EPS will also have flat growth in FY2012. Overall, Shriram Transport Finance Corporation is a sound company. Investors can use its fixed deposit scheme to earn good returns at 10.75% for a 3 years period. Rating FAA assigned to the fixed deposit indicates that the company can service its obligation.

Conclusion

If you are comfortable with doing a little bit of research Company Deposits can be promising investment options. Basic rule is to go with renowned names with proven track record. It’s not advisable to be invested in long term deposits as default risk increases with tenure. Enjoy the new armor in your kitty.