Bajaj Finance FD: Good one for the long haul

Looking for safe fixed deposit options that also give good returns? A fixed deposit scheme of Bajaj Finance, which has opened up recently for subscription, fits the bill. The deposits are rated FAAA by CRISIL. This rating indicates that the degree of safety regarding timely payment of interest and principal is very strong.

Bajaj Finance is accepting deposits for periods ranging from one to five years. The three-year option alone offers 10 per cent returns. The rest of the tenures fetch 9.75 per cent. There is no minimum amount specified to invest in these deposits. Senior citizens and loan holders are offered an additional 0.25 per cent across all tenures.

But note that these rates are for the cumulative option. In case you require regular payouts, the rate comes down to 9.5 per cent for three-year deposits and 9.35 per cent for the rest.

Investors can choose the four- or five-year cumulative option, which offers 9.75 per cent. For one, existing bank deposits for a similar tenure don’t match up to these rates. Most public sector banks offer 9 per cent for a five-year deposit. Karur Vysya Bank offers the highest rate of 9.25 per cent for this tenure among all banks.

Two, compared with other AAA rated corporate and non-banking company deposits such as those from HDFC, National Housing Bank and LIC Housing Finance, this rate is 15-75 basis points higher.

Only Mahindra & Mahindra Financial Services (FAAA) offers an equivalent 9.75 per cent for four and five years. The Bajaj Finance deposit goes well as a diversifier.

Although the Reserve Bank hiked the repo rate early last week, most banks are not expected to increase deposit rates, given the reasonably comfortable liquidity situation over the last two months.

With the recent hike, widely expected to be the last one, deposit rates can safely be assumed to have peaked and may start coming down by the end of this year.

So, investors can safely lock into the four- or five-year FD from Bajaj Finance.

In a scenario of declining deposit rates, a longer tenure brings down the reinvestment risk for your savings.

This is the reason for not recommending the one- and two-year FD, which offer the same 9.75 per cent. On maturity of these deposits, options with equally attractive or higher rates may not be available for reinvestment.

While the 10 per cent for three years does look inviting, those with a specific timeframe of three years in mind can choose the M&M Financial deposit, which offers a higher 10.25 per cent.

Bajaj Finance is among the largest consumer and SME finance companies in India. Both segments continued to deliver strong loan growth in the latest December 2013 quarter.

The company has also adopted the Usha Thorat committee recommendations on loan classification ahead of its implementation.

Its gross and net NPAs (non-performing assets) stood at 1.15 per cent and 0.23 per cent as of the December quarter. Its capital adequacy is at a comfortable 19.5 per cent.

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