With the call for interest rate cuts getting louder, returns on debt instruments may begin their descent soon. It therefore pays to lock-in surpluses that you may currently have at the prevailing rates.

For those with an appetite for risk, an attractive investment avenue is the Fixed Deposit from Shriram Transport Finance Company.

For a minimum of Rs 25,000 and in multiples of Rs 1,000 thereafter, the company is currently accepting deposits for maturities ranging from one to five years. These deposits have been rated FAA+/Stable by CRISIL, indicating high degree of safety regarding timely servicing of financial obligations.

Deposits are offered under both the cumulative (where interest is paid out with the principal on maturity) and non-cumulative (where interest is paid out on quarterly/half-yearly/annual basis) options. The accompanying table details the interest rates offered for various categories. Senior citizens are offered an additional 0.25 percentage points.

Cumulative and 3-year option

Unless looking for a regular income from this investment, investors are recommended to deposit under the cumulative scheme for three years. The company offers an interest rate of 10.75 per cent for the same. For investors in the 10, 20 and 30 per cent tax brackets, the post-tax returns work out to 9.6, 8.5 and 7.4 per cent respectively. While Mahindra and Mahindra Financial Services, a peer vehicle financing company offers only 10.25 per cent for a three-year deposit, most bank deposits offer a much lower 8.75-9.5 per cent interest for this period. The one-and two-year deposits are not recommended for two reasons. One, the rates offered (9.25 per cent for one year deposits and 9.75 per cent for two-year deposits) are 1-1.5 percentage points lower than three-year deposits. With the interest rate cycle all set to move downwards, there many not be good reinvestment options among deposits over the next 1-2 years, once this matures.

Two, many banks offer similar or even higher interest rates for the same period. For example, City Union Bank and Lakshmi Vilas Bank offer 10 per cent and 9.75 per cent for one and two year deposits respectively. Considering that bank deposits up to Rs 1 lakh are covered by deposit insurance, bank deposits are a superior option for this timeframe.

Company details

Shriram Transport Finance is an asset financing, non-banking financial company, catering to the funding needs of the pre-owned truck and new truck segments. For the year ended March 2012, a slowdown in the auto sector has curtailed growth. The company's assets under management stood at about Rs 40,200 crore, growing by about 11 per cent year on year. Its net profits grew by about 3 per cent to Rs 1,257 crore in 2011-12. While net interest margins did face pressures, a high return on assets of 3.7 per cent and strong asset quality with a net NPA ratio of 0.4 per cent are positives.

>Vardhini.c@thehindu.co.in

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