Investors in India are nervous with sudden downgrades and negative news across debt and corporate FD market. It all started with IL&FS and the latest is PMC bank however it is interesting to note that this phenomenon is not new. Thus, the investors today seek to diversify their investments from risk perspective and not just returns.
So how does an investor determine risk involved in adebt instrument or FD? One of the tools that is available to investors is to check out the credit rating of the company offering debt or FD.
Credit Rating can help you determine the amount of risk involved, It is a quantified assessment of the creditworthiness of a company and accordingly one can make investment assessment.
In the corporate FD segment where typically the investor gets relatively higher returns than a Bank FD, the credit rating is altogether important because the risk can also be higher.
However, here one can look at corporates that are backed by Government, having good credit rating and have good track record to mitigate some of the risk.
For example, in the Housing Finance Company (HFC) space, companies like PNB Housing Finance FD enjoys CRISIL ‘FAAA/Negative’ and CARE ‘AA+/ Stable’ rating which indicates relatively high level of safety and at same time investors can get relatively higher returns.
The other benefit of investing in high credit rating deposit is that investors can apply for loans against the deposits or can withdraw money before maturity subject to terms and conditions of the institution.
Also for a retail investors it can be relatively easy to deal with a HFC (Housing Finance Company) like PNB Housing Finance Limited as:
- It has more than 3 decades of experience and is promoted by Punjab National Bank
- It’s the second largest HFC in terms of deposit size as on 30th Sept, 2019
- It has a robust network of branches spread across India which could help in availing services seamlessly
Companies having good corporate governance, track record and good credit rating especially that are backed by Government institutions could be better option for investment than corporates that are relatively new in the market.
However, a word of caution, Investors cannot only rely on credit rating for making investment decisions as Credit Rating is no guarantee for soundness of company. Credit Rating can be good starting point for investors and they should do their own research before investing or take help of a certified financial planner as financial planner can look at other qualitative parameters also.