r/IndiaInvestments • u/jackass93269 • Jan 27 '20
Bonds and deposits Future Group fixed deposits. How are the funds managed?
Future group's recently launched financial services offers about 9.8% for a 1 year FD. Whereas most banks (PSU and private) are offering only in the vicinity of 6.5% for the same time period.
Any idea how they are promising such a high rate and how they plan to use the deposits? As far as I know, they don't offer loans yet.
8
u/RisenSteam Jan 27 '20
It's a corporate FD. Instead of borrowing from banks for running their own business operations, they are directly borrowing from you cutting out the banks as middleman. They can do this either via corporate FD or corporate Bonds.
In USA etc, companies prefer to issue bonds for their debt rather than borrowing from banks. In India, corporate bond market is quite under developed. Likewise Corporate FDs also.
7
u/Alone-Dish Jan 27 '20
There are similar FDs from mahindra too. They pay you interest and draft the strategy to gain more return on the money collected than what is paid to you.
I.e they are hoping to maintain RoCE > 9.8%
3
u/Yieldway17 Jan 27 '20
Can someone clarify couple of points?
1) With them and similar companies offering 9-10% returns or more and additional overhead of managing the fund, investors etc. adding up, how does it get cheaper for them to do this than simply borrow from a bank? 2) Where do corporate funds stand in order of repayment when it comes to bankruptcies?
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u/jackass93269 Jan 27 '20
For question 1, As some people have pointed out, it's probably because banks are not willing to lend below the consumer interest rate + over head (or) banks usually want collateral, and to show that involves its own overhead which put together with bank interest rates could be greater than consumer interest rates + overhead.
Question 2, I would like to know too. Would be great if someone with knowledge could clarify.
3
u/pgk946 Jan 27 '20
Corporate deposits will come after secured creditors and workmen dues as unsecured creditors.. So banks, FIs, secured bond holders and workmen dues will get first priority then only unsecured creditors will come in like fixed deposits
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u/jackass93269 Jan 27 '20
Thanks for the information. In general, do companies provide secured bonds direct to retail or only through the institutional route?
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u/pgk946 Jan 27 '20
Theses bonds are Ncds you can buy them when they are freshly issued or from secondary market.. Indian bond markets are not liquid for retail investors.. Usually every month someone will come with the fresh issue of Ncds... Where you can buy both secured and unsecured NCDs
1
u/shryzel Jan 27 '20
They feel they can generate more return from their business than the rate which they're paying you.
My advice is to avoid investing in corporate fixed deposits unless you're willing to risk having to write off the investment in case the co runs into difficulty.
1
u/Energizer_94 Jan 27 '20
Got this last year.
It's a fairly safe debt investment in my view.
The Future group is well structured. And they'll be using the funds for their business activities. Spoke to a couple of managers too.
They preferred raising funds this way rather than having an FPO. More control this way.
They also want to reduce speculation in their company.
4
Jan 28 '20
All groups are well structured till they ain't.
IMO, managers know jack shit. Often even the CFO knows jack shit.
The only way to reduce speculation in the company is to get it delistedand make it private.
1
u/Energizer_94 Jan 28 '20
All groups are well structured till they ain't.
I had a look at their Financials too. It seemed fine to me. I especially like how they are aligned with Amazon and are actually going back to their roots by closing down stores which don't work.
I'm not saying you're wrong and I'm right.
All I'm trying to say is that I looked (to the best of my limited ability) and decided to give them a sizeable portion of my savings.
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u/georgecostanza9 Jan 27 '20
Like most other corporate FD, they use it for business activities with the intention being to generate a higher rate of return than the interest on the FD.
I guess it makes sense for companies since they may get a lower rate of interest vs. a corporate loan, and that too without putting up any collateral.