Investment queries: What factors should I consider while investing in corporate fixed deposits?

fd-1Corporate fixed deposits often pay higher interest compared to bank FDs. How can I choose reliable corporate deposits to earn better interest income?
Jayant R. Pai CFP and Head of Marketing, PPFAS Mutual Fund
 replies: If you are a senior citizen, you should consider bank FDs for senior citizens or the post office Senior Citizens’ Savings Schemes (SCSS) before considering company FDs, as interest income of up to Rs 50,000 from these is tax free. If you are keen on company FDs, opt for deposits which enjoy the highest credit rating. You may have to sacrifice a little on returns (yield), but it is best to opt for deposits you can rely on rather than chase yields at the cost of quality. Also, go for company FDs over bank FDs only if the interest rates differential between the two is large enough—3-4 percentage points.

You should also opt for shorter-term deposits, say, 1-3 years. The longer the tenure, the higher the risk of the deposit being impacted by an adverse change in the company’s fortunes. Finally, keep an eye on the company’s corporate governance standards, its perception among stakeholders, media commentary on the company, etc. You need to keep track of this information because in case the company goes bankrupt, returning the money of fixed depositors won’t be its top priority and you may end up losing even your principal investment.

I am 37 years old and my aim is to build a corpus of Rs 2 crore in the next 18 years for my kids’ higher education. In January, I invested Rs 1.5 lakh each in Axis Bluechip and L&T Midcap, and Rs 2 lakh in HDFC Small Cap Fund. I want to investRs 10 lakh more in the next two months. Should I increase the contribution in the existing funds or buy new funds?
C.R. Chandrasekar CEO and Co-Founder,
 replies: We assume that you can take risks and have chosen not to invest in debt. Given your high returnexpectation, you will need to invest in aggressive funds. You may invest Rs 5 lakh each in L&T Midcap and Parag Parikh Long Term Equity. Invest over a six month period through systematic transfer plans. Also, consider increasing your investment. The existing and proposed investments may not be enough to accumulate the desired corpus as the high returns from the Indian equity markets may taper off in 15-20 years.