In recent times, there have been many cases of banks losing money which in turn has led to a loss of depositor’s wealth. This is not just possible with banks but also other financial institutions that accept savings or other forms of deposits including a fixed deposit. These events make it necessary to evaluate whether your fixed deposit (FD) investment is actually in safe custody. Whether you are a retail investor or not, it is critical to make this assessment for safeguarding your investment. This assessment starts with keeping a tab on various news regarding the financial institution and any discrepancies reported by its auditors. These reports serve as red flags and must not be ignored.
Fixed deposits have the lowest risk profile and offer a certain amount of returns at maturity. Fixed deposits interest rates are competitive and thus make it a lucrative investment avenue for risk-averse investors. Moreover, the FD eligibility makes it an inviting investment for all types of investors, retail as well as large corporates.
Here are some fundamentals to monitor to ensure your FD investments are in safe custody –
Financial indicators: The audit reports issued by auditors of banks and non-banking finance companies (NBFCs) help to identify the performance of the organisation. These indicators when compared to the organisation’s industry peers help determine the operating efficiency. There are four categories of ratios that need to be looked at. They are profitability ratios, growth rated ratios, the quality of asset determining ratios (deposits in case of banks and NBFCs) and capital adequacy ratios. These various indicators when combined help to evaluate on an overall basis whether your fixed deposit investment is safe or not. Also, remember that high fixed deposit interest rates should not be the only factor attracting you to invest, but these above-mentioned factors in combination with it.
Non-performing assets: Non-performing assets are found under the category of asset quality. These are the advances made by the financial institution which are prone to the risk of not being paid. Also, the rules prescribe a certain percentage to be classified as non-recoverable. These non-performing assets or NPA are over and above that specified percentage. Thus, they are a critical indicator to assure the safety of your investment.
Credit Rating: Whenparking your investment with any financial institution, make sure to check the credit rating and the revisions in the same. A credit rating helps to determine the organisation’s creditworthiness and its repayment capabilities. This way, you can have a certainty of the amount invested in the fixed deposit scheme. For instance, the credit rating of Mahindra Finance FDis rated at FAAA by CRISIL which indicates the highest level of security.
Apart from the fixed deposit interest rates, make sure to also check for the above factors along with some others like provision coverage ratio, capital adequacy ratio, return on asset ratio and the like. These various indicators will help to determine how safe your FD investment is.