NBFCs Raising Interest Rates On Fixed Deposits, But Risk Containment Essential

Interest rates in the economy are at elevated levels and till the time that inflation comes down they are expected to remain in this state. The Reserve Bank of India is taking a close look at the various data that is coming in so that they can decide on the next course of action. Meanwhile this situation opens up an opportunity for investors as they can invest additional amounts into debt generating higher returns and complete their asset allocation.

Several non-banking finance companies have also raised their interest rates on fixed deposits offered by them. Handling the investment decision here requires a well-rounded approach. Here is how to go about it.

There are various NBFCs that are operating in the country. These undertake lending in different areas and for this purpose, they require funds so that it can then be given out to borrowers. One of the ways in which they raise funds is through the route of issuing fixed deposits as these are attractive for a lot of investors who want an exposure to a fixed income instrument.

Investors, on their part consider, these FDs similar to other fixed income instruments that they have in their portfolio. There are several well-known names within the NBFC space issuing such FDs, so investors also have an element of comfort when it comes to investing in these entities. With a larger number of entities trying to raise funds, it is essential for the investor to be careful about their choices.

One of the key factors that is an attraction for the investors is that they get higher rates on these FDs as compared to what they would get with a bank. The rates for bank FDs are quite stable in the sense that they are dictated by bigger overall trends in the economy. On the other hand, when it comes to the NBFCs apart from the overall economic conditions, their behaviour is determined by the time when they want the funds, which often lead to a higher rate of interest to attract more investors.

In fact, in recent times, entities like Bajaj Finance Ltd. and Shriram Finance Ltd. have even raised the interest rates on their offerings, which makes it even more attractive for the investors to look at them. Investors on their part have to consider the overall return that is being generated from their debt portfolio and this becomes a segment that can provide a boost.

While higher earnings are one aspect of the investing process this is not the only angle to consider because this has to be balanced with the risk that comes along with it. Banks, for their part, have a greater confidence level for investors but when it comes to the NBFCs, there is a need to take a closer look.

The credit rating is one area that needs attention but at the same time, the investor also needs to look at the financials of the company and the area or sub sector that they are operating in so that they have a better idea of the situation faced by the NBFC. Ultimately it has to be a balance between the returns and the risk, and it would always be better to stick with known names with a strong balance sheet.

There are other considerations too that investors need to take when they are contemplating putting money in such FDs. One is the time period for which they would invest. Normally investing in a deposit for a very long period in such FDs is not a good idea as it may increase the risk element in the entire investment. It is difficult to predict what can happen over a longer period of time and this can put the invested amount at risk if the conditions change. The amount that is invested into this area also needs to be balanced out with the other investments in the portfolio because in the search for returns there.

should not be a very high exposure to a single instrument or area. Senior citizens and even women in some cases will get a higher rate of interest and this should also be considered as it can ensure a better outcome at the end of the day. Overall judicious selection and a restricted allocation can be a way to reduce the risk and still take some exposure to such instruments.

(The writer is the founder of Moneyeduschool)