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    Corporate FDs still attractive for seniors despite interest rate cuts

    Synopsis

    Over the last fortnight, AAA rated companies such as Mahindra Finance, Bajaj Finance, HDFC and LIC Housing Finance cut deposit rates by 30-50 basis points over all tenures.

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    Financial planners point out that investors before the recent cuts could earn as much as 200-300 basis points more than a bank deposit.
    MUMBAI: Triple A corporate fixed deposit rates have come down a bit reducing their attractiveness over bank and post office offerings. But senior citizens can still opt for them as they provide flexibility and higher rates.

    Over the last fortnight, AAA rated companies such as Mahindra Finance, Bajaj Finance, HDFC Ltd and LIC Housing Finance cut deposit rates by 30-50 basis points over all tenures. Since the government decided to keep the deposit rate of small savings and other postal products unchanged for the July–September quarter, the difference in rates paid by these NBFCs over postal deposits has narrowed. In some cases postal deposits do score better.

    “The difference has narrowed between bank deposits /small savings products and corporate fixed deposits making these attractive only for senior citizens whose income is not subject to tax or those wanting a regular, quarterly or half yearly income from fixed deposits,” says Mohit Mittal, Product Head – Investments, Bajaj Capital.

    Financial planners point out that investors before the recent cuts could earn as much as 200-300 basis points more than a bank deposit which compensated for the risk they took for investing in an NBFC. However with the recent cuts the spread has narrowed to 125-150 basis points.

    But even with a lower spread, these fixed deposits offer some benefits to senior citizens, financial planners say.

    For example, now a senior citizen can earn 6.2% on a 5 year SBI deposit, while LIC Housing Finance offers 6.35%, Bajaj Finance 7.35% and Mahindra Finance 7.50%.

    Corporate Deposit Rates
    Company1-year2-years3-years5-years
    Mahindra Finance6.70%6.95%7.15%7.25%
    HDFC6.36%6.36%6.46%6.46%
    Bajaj Finance6.90%7%7.10%7.10%
    LIC Housing Finance6%6%6.10%6.10%
    Note: Sr Citizen 0.25% extra

    “Postal rates have remained unchanged during this quarter, making returns higher than some company deposits. However liquidity is not there and servicing could be difficult for investors,” says Anup Bhaiya, MD and CEO, Money Honey Financial Services.

    For example, a Kisan Vikas Patra offers 6.9% for a 10.3 year deposit, while a five year postal time deposit fetches you 6.7%. Both score over a HDFC deposit rate of 6.61% offered for a 5 year tenure to a senior citizen.

    Company deposits can be done online, plus there is flexibility to structure interest payment which is absent in postal deposits. For investors looking for higher returns and ready to sacrifice liquidity with high safety postal schemes work well. Given that economic growth could be low due to Covid distributors advice investors to play safe and stick to only AAA rated deposits and limit exposure to individual companies at 10%. “Do not have more than a 10% holding in any single company as there is inherent risk attached to NBFCs,” says Mohit Mittal.



    ( Originally published on Jul 20, 2020 )
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    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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