How to Enhance Return on Corporate Fixed deposits and Bonds?
Fixed-income securities are products that generate a fixed interest rate for investors in the form of coupons or payments along with principal repayment on maturity. Interest is generally paid twice a year, with the principal invested returning to the investor at maturity. It includes securities such as Bonds, Fixed Deposits & much more. In this piece, we will be understanding the meaning & the strategies that an investor can use while purchasing these securities.
What are Corporate FDs & How do they differ from Bank FDs?
A corporate fixed deposit is a type of fixed deposit issued by a range of companies and non-banking financial institutions (NBFCs). Whereas, Bank FDs are the deposits offered by various banks. Banks provide fixed deposits as an investment avenue where you can deposit your funds for periods ranging from seven days to ten years. Corporate FDs can have maturities ranging from one to five years. Usually, the return provided by Corporate FDs is more than the return provided by Bank Deposits. Other advantages of a Corporate FD include monthly interest payment alternatives, simple loans, credit ratings, and so on. And further to maximize these returns, one can use the following tactics –
1. Make comparisons between the FDs
Assess all of the Fixed Deposits to see which ones are the best fit for you. Correlate Fixed Deposits from Banks vs Fixed Deposits from Corporations. Assess the risk, return, and duration to match the desired investment returns. The interest rate on each Bank Fixed Deposit is varied. Each institution will provide a different interest rate on corporate Fixed Deposits.
As an investor, your goal should be to choose the one that will give you the most return on your investment while also providing you with the principal protection. To do so, you must choose a fixed deposit only after assessing the benefits and drawbacks of the various Fixed Deposits available. CRISIL, for example, rated ABC Company’s FD as AAA rating. Similarly, other FDs will also be assigned ratings based on the company’s track record, making it easier for the investor to choose the best one.
2. Consider investing in Floating rate FDs
Floating Rate FDs have a rate of interest that fluctuates in lockstep with a reference rate that is altered on a regular basis in line with the interest rate cycles, rather than being stable for the whole duration of the deposit. This investment enables the investors to take advantage of interest variations mainly during the interest rate hike regime. The reference rate is generally linked with the Bank’s Treasury bill rates, which are offered every 2 weeks on the RBI site, and are subject to a yearly mark-up. The reference rate can also be linked to inflation, Repo/Reverse repo etc rates
Floating Rate FDs are a good choice for low-risk Fixed Deposit investors who may not want to gamble on interest cycles and want to invest for the long term.
3. Opt for multiple FDs
Every individual must be aware that all investment and investment vehicles carry some level of risk. Indeed, in today’s volatile world, there are no risk-free investments. Every investment carries certain risks, which we as consumers are often unaware of. Nevertheless, you can get around this by putting together a Fixed Deposit ladder.
Simply divide a large Fixed Deposit into smaller Fixed Deposits and book them for various terms. This ensures the security of your money to a degree & also you will be able to get more return over it as the amount of investment will be diversified & provide liquidity.
4. Invest in a cumulative option
Monthly, quarterly, half-yearly, and yearly interest is paid on non-cumulative FDs. This plan is better for retirees who require regular payouts. On the other hand, cumulative fixed deposit plans raise interest rates. As a result, you will receive better gains at maturation. Therefore, if you want to maximize your wealth, a cumulative FD can be a better fit for you. Now that we’ve covered Corporate FDs in the first section, let’s look at how the bond market works and what strategies a bondholder may use to maximize his or her returns.
How do Bonds work?
A bond is just a debt that a company takes in. Rather than going to a bank, the company obtains capital from investors who purchase its bonds. The corporation pays an interest coupon in return for the investment, which is the yearly interest rate paid on a bond stated as a % of the face value. The interest is paid at preset periods annually or semi-annually and the principal is returned on the maturity date, bringing the loan to a close. Also, the benefits of investing in Bonds include – rated on risk level, low-risk investment, Predictable returns &, etc.
Overall, when the economy picks up, bond returns might have two opposing consequences. Fixed-income returns are heavily influenced by interest rates. Bond prices decline as interest rates climb. Bond prices rise when interest rates fall. Navigating a changing climate necessitates forethought. And, in order to maximize these profits, the following strategies can be used:
1. Bond Tactic for the Short Term – One of the simplest solutions for bondholders who expect rates will rise is to shorten the term of their bond portfolios. The sensitivities of a bond’s price to interest rate changes are measured by its tenure. If the rate of interest on a 10-year bond rises by 1%, the bond will gradually lose 10% of its value. And hence, this is something that the bondholders can consider for maximizing their returns.
2. Bond laddering – It is a technique that entails spreading your funds across a number of bonds with progressively longer durations, and is usually suggested for buyers seeking to produce income from bonds. Laddering is a strategy for reducing interest rates and reinvestment risk. If interest rates rise, you reinvest the bonds at the bottom of your ladder that are about to mature into higher-yielding bonds. Since you will have longer-maturity bonds at the peak of your ladder that isn’t affected by rate drops, you’re safe from reinvestment risk.
3. Reinvesting your interest income – It is a technique wherein you reinvest the interest of your bonds. Individual bond purchases necessitate discipline since you must put each coupon payment to work earning income rather than spending it. Consider depositing them in any deposit account or perhaps a separate savings account for your coupon payouts. You may invest them during the next bond in your laddering approach at the end of each year.
Lastly, a corporate FD is identical to a bank FD, except a corporate FD offers a higher return while posing a lower risk. Corporate fixed deposits offer a good level of security because the majority of the instruments are rated. Whereas, Bonds, on the other hand, are debt instruments with a low level of risk. Investing in Fixed Deposits & Bonds; can be a great method to diversify your portfolio and safeguard yourself from price fluctuations if you’re heavily invested in equities. Also, if you are nearing retirement or have reached your retirement age, Bonds & FDs can be the preferred investment for you.
An investor can choose a product that best suits him or her as per their financial aim, risk capacity, and the time duration they want to invest. RURASH is amongst the best Indian investment management firm, providing financial solutions to augment the client’s wealth and facilitate building a legacy.