Softer company fixed deposit rates to dent investors’ income

MUMBAI: Retirees and other investors dependent on fixed income are in a spot as deposit rates on company deposits, a popular instrument in which they invest, are coming down. Company deposits of Shriram Transport Finance, Mahindra Finance which used to pay anywhere between 10 and 11% three years back, now pay between 8 and 9%.

In the past couple of weeks, several companies such as DHFL, Shriram Transport and several others have cut their deposit rates further by 25-50 basis points. “Deposit rates have gone down across the board. Company fixed deposits still pay about 100-150 basis points extra than bank deposits,” said Anil Chopra, group CEO and director, Bajaj Capital.

While a fixed deposit with State Bank of India fetches a maximum of 7.5%, a fixed deposit with Shriram Transport Finance pays 8.75% which is 125 basis points higher. Hence, Chopra advises investors to stick to these highly-rated fixed deposits despite the rate cuts and not take risks by going to lower-rated companies. Some financial planners believe retirees could still continue to look at post office savings products as they still pay higher than bank deposits.

“Senior citizens in low-tax bracket can first invest in Post Office Senior Citizens Savings Scheme (SCSS), as interest rates still continue to be 8.6% there. Once that limit is exhausted, they can invest in low-risk short-term debt plans,” said Vidya Bala, head of research at Fundsindia.com. Among debt funds, she recommends HDFC Short Term Opportunities Fund.

Wealth managers believe investors could keep their tax bracket in mind while investing in fixed deposits. Typically well-managed debt oriented funds could give you about 50-100 basis points higher than fixed deposits with better tax efficiency. For a person in the highest tax bracket, if a fixed deposit pays 8%, the post-tax yield will be 5.53%.

On the other hand, if one remains invested in a debt fund for more than 36 months, they get the benefit of paying long-term capital gains of 20% with indexation benefits, which could improve their post-tax returns. This substantially brings down their tax liability. “In addition to this, investors should keep an eye on nonconvertible debentures which come in the primary market, and offer a little extra than fixed deposits,” said Anup Bhaiya, CEO, Money Honey Financial Services.