Monday, 20 October 2014

Know all about Non-Bank Fixed Deposits

Bank fixed deposits is an all-time favorite investment vehicle for a large number of investors. While bank fixed deposits offer secured returns and other intrinsic advantages like option of availing loans and flexible tenure, banks are quite often the first ones to reduce interest rates on deposits in case of a recession or bad market economic scenario. Since most banks offer similar interest rates, the reduction of fixed deposits interest rates is usually uniform across all public and private banks. It is during such a scenario that investors look for alternate investment options that can offer similar advantages as bank fixed deposits.

Non bank fixed deposits or corporate fixed deposits are one such option that allows investors to invest their funds as deposits under various fixed deposit schemes. These non banking financial institutions have the complete authorization of Reserve Bank of India to seek investment from normal public and must not be compared to other crony ponzy schemes often operating in a recession market. Let us look at various aspects of investing in a Non-Bank Fixed Deposits or company fixed deposits a s they are commonly called.



Types of NBFC Fixed Deposit Schemes:  Investment in fixed deposit schemes of various non-banking financial companies have been authorized by RBI to have a term period between 12 months to 5 years. The rate of interest for such non banking financial companies FD schemes is higher than traditional bank fixed deposits but the investments are highly unsecured.

Non Banking Financial Companies have a two tier system for investors known as the cumulative fixed deposit scheme and non cumulative fixed deposit scheme. In the cumulative fixed deposit scheme, NBFCs offer interest at the end of the fixed deposit tenure. The interest keep son getting accumulated to the principal amount leading to higher returns. At the end of the investment tenure period, the investor gets principal amount along with the accumulated interest.

On the other hand, in case of a non cumulative fixed deposit, the interest earned by the investor is paid off on a regular periodic basis depending on the preference of the investor. Interests are usually paid out quarterly, half yearly or annually. Since in case of non cumulative fixed deposits the interest earned in not added to the principal invested amount, the returns are lower compared to non cumulative fixed deposits.

Fixed Deposits and Company Ratings: Before investing in fixed deposits in non banking financial companies, an investor must do a background check of the company in terms of its rating and performance. Various financial agencies like CRISIL and ICRA rate such non banking financial companies that accept investments from general public. The ratings are done in accordance to the new owned fund or NOF of the company along with RBI slabs and ceilings. The ratings of NBFCs give a perfect yardstick for investors to choose the right company for investment of their funds.

Interest Rates: Non banking financial companies offer higher interest rate for investments compared to bank fixed deposits. Reserve Bank of India has stipulated the maximum upper limit for interest rate at 12% for all investments made to various NBFC fixed deposit accounts. Considering the fact that maximum interest rate in today's economic scenario offered by banks ranges close to 9%, non banking financial companies offer interest rates between 9 to 12% making them an attractive investment option for a number of investors.

Premature Withdrawal Options: Investing in fixed deposits of non banking financial companies come with a lock in period of 3 months. After the expiry of the initial lock in period, the investor is free to withdraw funds prematurely from the deposit. Each NBFC can its own terms and conditions catering to penalties and calculation of interest accrued for premature withdrawals.


Other Advantages: While the investment may not be highly secured as bank fixed deposits, NBFCs offer a higher interest rate than bank fixed deposits. Like bank fixed deposits, nomination and premature withdrawal facility is available for company fixed deposits. The procedure to enter any company fixed deposit investment scheme is simple and non complicated allowing common investor to invest with ease.

Thursday, 9 October 2014

Why is it better to Invest in FDs than Mutual Funds?

From time immemorial, there have been some momentous questions that have invaded the minds of the rational, clear thinker- the chicken or the egg, democracy or dictatorship, the Beatles or Metallica? For the 21st century investor in you, one of the paramount questions is this- Where must I invest, in fixed deposits or mutual funds?

Both FD and mutual funds make logical arguments for their selection. Mutual funds are the new kids on the block, prospective high returns, seemingly progressive and definitely a better tax saving option as compared to FD. Fixed deposit on the other hand is considered a safer option, comes with a better guarantee in terms of the ready availability of funds and has that ‘traditional’ and ‘long-term’ vibe working for it. We are presenting below, a clear selection of reasons that put FD a notch above mutual funds as your ideal choice of investment. Of course, the final choice is always yours to make…

Think Long Term, or a year or two…
The lure of mutual funds lie in its short term success- your investment, a progressive market, good returns. However, fixed deposit ensures a reliable and steady FD interest rate that remains constant over a short term or long term duration. While this ensures security for your investment, it also sees to it that the chances of you losing money on your FD investment is a very tiny, miniscule percentage, against the constant unreliability of mutual funds.

No fees on investing…
Unlike mutual funds that require a minimum surcharge for the management of investment and distribution of funds, charged irrespective of actual returns gained, a fixed deposit doesn’t require any additional fees to get going. The FD is in place to only earn positive paybacks for the investor without demanding any additional monetary inputs to begin with.

More liquidity equates to ready cash…
True, most FD portfolios are conceived with an intent to invest money for a long duration, however, many banks allow you to withdraw your money prematurely, with a very small penalty (usually 1%). This ensures that you always have a source of ready, liquid cash that can be accessed immediately if situations thus demanded. This shouldn’t play havoc with the FD interest rate too as you will receive an interest rate in line with the duration your money was part of the FD portfolio. On the flipside, mutual funds fine a 1% exit load on prematurely terminated portfolios, while paying out interest on the prevalent Net Asset Value (NAV) that is squarely dependent on the ups and downs of the financial market.

Consistent return on FD investment
Investing in a fixed deposits come with an assurance that the FD interest rate that was promised to you at the time of the purchase of the fixed deposit will remain a constant factor through the duration of the policy. Such a promise isn’t a possibility with mutual funds. In the latter, the market decides the fate of your investment- it could be an impressive return in line with the market’s upswing, or you could lose money as the market hits the ground.


Bottom line- FD gives you safety, and an assurance of a fixed income on your investment. Fixed deposit is the choice of a safety oriented, smart and optimistic investor, who isn’t willing to cast away his/her hard earned money on the whims of an often volatilemarket