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Minimise risk, invest only in FDs of reputed firms

  • Conservative investors are always searching for that extra percent. Since they invest most of their savings in safe avenues like bank deposits, it is very important for them to earn an extra percent from other relatively safe instruments like company deposits. Naturally, they settle for manufacturing companies offering fixed deposits for tenures ranging from one to three years.

    Today, investors have many such options like Ansal Housing, Apollo Hospitals, Unitech, Bilcare, Godrej Properties and Unitech. Typically, one can earn around 9-12% from these company fixed deposits.

    But the problem with these company FDs is choosing the right one in the absence of a 'rating'. This is because apart from NBFCs and housing finance companies, other companies need not go for a rating for their fixed deposits.

    "Do look at the financials of the companies. The company must be making profits and paying dividends year after year," says Anil Chopra, chief investment officer and director, Bajaj Capital. If the company is posting sustained fall in revenues and profits, it is a cause for concern. "Simply avoid companies that are making losses," Chopra adds. You will be better off looking at taxes and dividends paid by the company.

    Since these two are cash expenditures, paid to outsiders such as government and non-promoter shareholders, there is little accounting jugglery possible here. A sustained increase in taxes paid and dividends indicates that company's business is doing well. If you can do some number crunching, do look at the interest coverage ratio - just divide 'earnings before interest and tax' by the interest paid by the company. Higher the number, the better it is. You can also look at the debt-equity ratio - total debt divided by shareholder funds. Lower the number, the better it is.

    In case of companies listed on stock exchanges, you can get yearly and quarterly numbers of these companies on websites of the exchanges. Many companies have raised money using foreign currency convertible bonds in 2007-2008. In some cases the stock prices are lower than their 2007 highs. In these cases, the bondholders are not keen on conversion of their bonds into equity. In such cases, the companies are keen to raise money from all possible sources. If such companies are offering fixed deposits, one has to be doubly careful. If the company could not raise enough money, there may be a default on FCCB redemption which can set the company in a tailspin. Being unsecured borrowing, the interests of the fixed deposit holders may be compromised.

    "If the promoter shares are pledged, investors need to be doubly cautious," says Ashutosh Wakhare, trainer at Nagpur-based Money Bee Institute. Information pertaining to this is readily available on the websites of stock exchanges in case of listed companies.

    A beginner in this field may be lost in the numbers game. Hence it is better to stick with companies that are accepting fixed deposits for a long period of time. A long track record surely offers some comfort.

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