Renew Bank fixed deposits

New year is a time for reflection and these are the thoughts that came to my mind:
Q1: Should you check the “auto-renew” option in your FD?

NO, Never! Seems to be that this is a huge scam. The banks seems to offer interest rates based on the duration of the FD and the slab for the highest interest rate changes every month/quarter. Hence an auto-renew option will only lock you in an unfavorable interest rate slab. Refer to the Citibank interest table to understand what I am trying to say.

Q2: Is FD best investment options?

It provides good flexibility (you could open an FD any day for any amount and withdraw it at an hour’s notice) but this comes at a cost. i.e. interest rate/returns are substantially lower. So generally speaking it is better to keep money in FD rather than savings bank account, but not for multiple years.

Also one should be aware that there is TDS (tax deduction at source) and interest income is fully taxable. Hence one should look for more tax-friendly options. Generally I use FD for 2 purposes:

1. Planned expenses: purchase of house/car, insurance premium, vacation, tuition fees etc. FD allows you to accumulate funds whose maturity matches with your cash-flow projections ensuring that one is not cash-strapped at any time.

2. Unplanned savings: Procrastination & asset sterilization: Excess money in one’s bank account always gets spend. Many people avoid credit cards as it prompts them to spend more. Fixed deposit is a good place to park the savings (esp. excess monthly surplus) till one finds a more lucrative use for them.

So essentially use FD as a planning tool rather than an investment tool.

Q3: Should you break an FD or take a loan against it?

As a rule of thumb any FD opened less than 6 month ago should be broken rather than restructured (loan/borrowed against). the accumulated interest will not be substantial enough to make a difference. Similarly for a long duration FD, if you want to liquidate just a few days before maturity, it is advisable to take a loan rather than break it. This way one saves a lot on the penalty and reduced interest rate due to pre-mature closing.

If you are somewhere in the middle, one has to make an assessment on the difference between the FD interest rate vs. prevailing interest rate, how long do you need the funds for, and how much do you lose due to premature withdrawal.

Q4: What is the ideal tenure of an Fixed Deposit?

rule of thumb: make it long enough that it is meaningful and earns you a decent interest rate. However don’t make it so long that you are locked in and cannot use when you need it. The purpose of FD and money is storage of wealth and what good is a stash if it cannot be accessed easily. If you want to park the funds for 2 years and interest rate for a 365 day FD is same that for 2 years, then go for 1 year FD and renew it on the second year (provided you believe interest rates are not going to change) this way if you want to premature withdraw the funds, then you loose lesser money.

Q5: Should you opt for monthly, quarterly or interest payment at maturity

If the amount is small and the duration not in decades then it hardly matters. However a periodic interest credit in your account is a good reminder that you have and FD and at maturity it needs to be processed.

Here is the Citibank India’s Fixed deposit interest rate

Tenure In Days 7-14 15-25 26-35 36-45 46-60 61-90 91-150 151-180 181-270 271-400 401-731 732-1095 1096-3659 >=3660
For amount <1 crore* 3.00% 3.25% 3.50% 4.50% 6.25% 7.75% 7.00% 7.75% 7.00% 7.75% 7.50% 7.75% 6.75% 6.75%

Although one of the lest glamorous of the investment instruments, bank fixed deposits are widely used by individuals and corporate to park their surplus. It is flexible, but it is not as simple a instrument as it appears to be.

M&A deal structuring: All cash or stock or seller financing

Recently my colleague and I were discussing the impact of the deal structuring on the valuation of the target company (from the eyes of the acquirer and its shareholders). Few of the points discussed here are as follows:
1. Any investment (Greenfield/brown-field/acquisition) should be aimed towards creating the highest NPV for the company. Also if the deal is profitable, then rarely do firms have issues in tapping the capital market. Hence structuring has only a marginal impact.
2. A company which is not excessively levered (manufacturing firms with huge debts) or is a bank with minimum capital requirements should always go for all cash deal rather than a stock deal. This is because of following reasons:
a. If the company has huge stockpiles of cash/cash equivalents, then most likely this money is earning a miniscule LIBOR rate and any wise business investments should beat this return by a huge margin. (low opportunity cost)
b. If the company does not have too much capital, then cash deal will force them to borrow and debt servicing often improves the financial prudence of the target.
c. I believe a bird in hand is better than 2 in the bush. A company should either return the surplus to the shareholders as dividends or it should invest. Otherwise management forgets its fiduciary duties and tends to squander away the money through pvt. Jets.
d. Also it puts a cap on the size of acquisitions and its frequency. Thereby minimizing the risk taken by share holders.
3. Seller financing is very common when a PE or financial firm is selling the asset. This involves the seller to fund the acquisition by loaning part of the proceeds (sometimes working capital/corporate debt to run the firm too). The only question one needs to ask themselves why was the seller in such a hurry to offload the asset that it did not even stop to collect the cheque? Any FCFE computation would look very rosy because of the reduced capital requirements, but one should not under estimate the risks.
4. Unless there is a severe liquidity crunch, share dilution rarely works in the benefit for the existing share holders. Lesser the mouths to feed, the more for me.
5. Not to mention that stock deal means 100% financing through equity. Since equity is more expensive then debt/free cash, unless the stock is over-priced it rarely makes a good business case.
6. Also because of the exit restrictions stock deal don’t have an earnout components (or have smaller mgmt retention bonus). Hence acquirer takes in more risks than the conventional deals.
7. EPS bump: A lot of firms trading at very high PE ratio believe that by acquiring another company trading at a much lower PE ratio, they increase the EPS of their company and hence create share holder wealth. But the challenge remains in convincing the investors that the bigger elephant will continue to grow at the same rate.


Bonds Explained: Part II: Bonds vs. Debt Funds

This is in continuation with the Bond vs FD post. Please refer to it for some technical jargons.

Contrary to popular perception, one can actually lose money in a guild fund. When the interest rate goes up, the bond becomes less valuable. (as bonds offering higher interest rate are available in the market) For more details please refer to Macaulay Duration ( Also fund managers are required by law to disclose their portfolio and they usually don’t churn their portfolio frequently enough. So if I were you, instead of investing in a guild fund, I would invest directly into the individuals bonds and save on the Fund Management fee, exit fees etc.

Why my financial planner never told me about them. Simple look at who is paying them…. Usually it is the firm selling the financial products. So if you invest in a 15 year bond then he/she can be assured that you won’t touch that money for the next 15 years. So there goes all the commission that could be made when you switched from one fund to another every 6 months.

PS: There is a slight difference in tax implication in various instruments, but since I don’t have an official degree in Tax, I would advise to consult your tax planner.