HDFC: Shelter for taxing times

S. Vaidya Nathan

WITH interest rates becoming highly volatile, the fixed deposit programme of Housing Development Finance Corporation of India (HDFC) is still a quality option.

What is interesting is that the company, which usually takes an early view of the interest rate changes, has refrained from doing so despite the recent moves by the Reserve Bank of India.

Perhaps, the view is that the recent hike in rates would not be of a lasting nature and the measures may be wound down by the RBI once the rupee-dollar parity becomes more stable. But the recent rupee-linked gyrations notwithstanding, the interest rates seem to have bottomed out from a one-year perspective.

But any uptrend in interest rates for depositors seeking long-term fixed-income options of two years and more, a sharp spurt in the interest rates do not seem to be in the offing in the short term. In this context, it may be better to parcel out investible sums in a manner that they are to be parked in fixed-income instruments over the next 12 months.

An exposure to HDFC's FD programme could be a part of an exercise in building a fixed-income portfolio. HDFC offers 9 per cent, 9.5 per cent and 9.75 per cent respectively for one, two and three years respectively under the monthly income plan and 10 per cent under the five-year option.

Under the cumulative and non-cumulative plans, the rates offered are 9 per cent, 9.5 per cent and 10 per cent for one, two and three years respectively and 10.25 per cent for five years. Deposits are accepted at HDFC, Second Floor, ITC Centre, 760 Anna Salai, Chennai - 600 002.

The five-year option can be avoided as locking into 10 per cent for three years may be better than chasing the incremental 0.25 percentage points and locking in exposures for two more years. Though the rates on offer may seem to be on the low side, investments in the FD programme of HDFC are eligible for the benefits under Section 80L.

Though other options are available for taking benefits under this Section of the I-T Act, HDFC is certainly among the better ones. If one factors in the tax element, the effective rates earned would be higher than deposits that are not entitled to this benefit. It is in this context that HDFC's fixed deposits have to be viewed.

As for the safety of HDFC FDs, there is no cause for concern. HDFC is fundamentally sound as the accompanying financials table shows. Revenues and profit have shown steady growth and the quality of the assets is high.

HDFC's investments in other businesses, such as banks, have proved to be good and it plans to foray into the insurance business. The good management quality should be of comfort to an investor in HDFC's fixed deposit programme. On balance, a worthwhile option. Perhaps, investors can space out investments over the next 12 months to take advantage of any small upside moves on interest rates.