A little risk for better returns

You don’t want to deal with the vagaries of the stock market. But if you can stomach some risk, look to fixed income options among corporates/NBFCs for better returns than bank deposits.

Banks are already beginning to trim the interest rates they offer on fixed deposits, with lenders such as Karur Vysya Bank and Laxmi Vilas Bank slashing rates in recent times. Second, the recent change in capital gains taxation on mutual funds that are not equity-oriented also bring fixed deposits into better light.

Third, the room for interest rates to move up from here is limited, making this a good time to lock into deposits that offer better rates. With rates headed downwards, having a slightly longer investment horizon reduces the risk of having to hunt for new fixed income instruments at better rates in the immediate future.

You can consider investing in the three-year option of Shriram Transport Finance’s Unnati fixed deposits scheme. For this period, deposits carry an interest rate of 10.75 per cent. In the 10, 20, and 30 per cent tax brackets, the post-tax returns work out to 9.8 per cent, 8.8 per cent and 7.7 per cent, respectively.

You will, however, have to be able to take on a little more risk than you would with bank fixed deposits. The company’s deposits are rated MAA+ by ICRA and FAA+ by CRISIL, one notch lower than the highest level. But the ratings do signify a high level of safety regarding timely payment of both interest and principal.

Go for the cumulative option, as interest here is reinvested, which maximises returns. The minimum investment under the cumulative option is ₹5,000 and in multiples of ₹1,000 thereafter. Interest is usually compounded annually. If the non-cumulative option is what you prefer, the minimum investment is ₹10,000. Interest payouts can be monthly, quarterly, half-yearly or annually.

The three-year rates offered under the Unnati scheme are among the highest for NBFC deposits with similar credit ratings. For instance, HUDCO, rated CARE AA, offers 8.9 per cent for three-year deposits. The Unnati scheme is not comparable to bank deposits, which still are the safest instruments for investments, given their lower credit rating and the fact that the deposit holder is an NBFC. Still, bank fixed deposits offer around 8.5 per cent to 9.3 per cent returns on deposits with tenors between three to five years.

Unnati’s four- and five-year deposits also carry the same interest rate of 10.75 per cent. But these periods are not recommended as the interest rate risk is higher. What’s more, cycles can change drastically over five years and are hard to predict for such a long period.

Shriram Transport Finance primarily provides financing for commercial vehicles. It holds about 25 per cent market share in the high-yielding pre-owned truck financing segment and about 5 per cent of the new truck financing market. Its geographical reach is quite vast, with a presence in 629 centres in rural areas alone. Its loan book grew around 7 per cent in the 2013-14 fiscal over the previous year to ₹53,100 crore, though its gross non-performing assets moved up to 3.9 per cent from the preceding year’s 3.2 per cent due to the economic slowdown.

Its net profit declined by 7 per cent to ₹1,264 crore. But being in a niche segment with good market share, the company is well-placed to benefit from a recovery in the economic cycle.

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