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Things To Check Before You Invest In A Company

A high rate of interest is no good if the company doesn’t have the wherewithal to deliver the goods once your fixed deposit matures 10 years down the line!

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As an investor, picking the right instrument to park your savings in is just step 1. Step 2, which is picking the right company to invest in, is equally important for a high-performing portfolio. Consider this example to understand why: As a young investor who’s also a first-jobber, it’s possible that once you pay your smartphone’s EMI and take care of monthly utilities, you have little to spare. So, you’ve decided to invest in a tried and tested fixed deposit to lay the foundation for a high-performing portfolio. But as all fixed deposits aren’t created equal, picking the one that matches up to the expectations that you have in mind is key.

By examining just a few key parameters, you can make a fair assessment of whether or not you should invest in a company. Here’s what you need to look into to make a prudent decision.

The company’s ratings
To make this task as easy for you as possible, credit rating agencies such as CARE, CRISIL and ICRA, rate financial products in terms of the risk they carry on the basis of the granularity of the FD programme, liquidity capacity and renewal rate on offer, amongst other factors. On examining the investment thoroughly, the attach a rating to it.

For instance, in the case of an NBFC fixed deposit, CRISIL’s highest rating is FAAA, while ICRA’s is MAAA. This indicates that the FD is likely to give you the returns due to you on time and in full. While this instrument isn’t linked to market fluctuations, the rating serves as assurance that the company will indeed return the principal and interest to you at maturity.

The company’s performance
While a credit rating is perfectly adequate, if you’re willing to go a step further, consider the company’s financial performance in the recent past. As a thumb rule, pick companies that have been earning profits and paying dividends for a few years consecutively. The working capital health of any company determines its ability to meet everyday expenses, and so, a steady decline in working capital or a negative working capital are certainly red flags to watch out for. Also look into the liquidity of the company, in other words, check what assets the company holds and how quickly they can be converted into cash. The shorter the duration, the better.

The company’s goodwill and stability
Don’t neglect research! With ample information available on your fingertips, it’s a good idea to check how long the company issuing the FD has been in business. In general, the longer the duration of business, the surer you can be of the issuer’s stability and its grip on operations. This is essential as it indicates that the issuer has the experience and resources to bounce back if the situation were to ever arise.

Moreover, customer reviews will bring to light the finer aspects of investing. Can you truly invest online in minutes or do so without submitting reams of paperwork? Answers to such questions are available easily and will help you get a sense of the goodwill that the company has garnered for itself amongst investors.

It’s imperative that you don’t make your investment decision solely on the basis of the interest rate on offer. While the yield you’re likely to receive as well as value-added features are of immense importance, examining these parameters will give you a clear picture as to whether or not you are investing in the right company for the long run. Remember, a high rate of interest is no good if the company doesn’t have the wherewithal to deliver the goods once your fixed deposit matures 10 years down the line!

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

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personal finance

Sachin Sikka

The author is Business Head - Retail & Corporate Liabilities, Bajaj Finance Limited

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