The Securities and Exchange Board of India (Sebi) recently barred Kotak Mahindra Asset Management Company Ltd. (AMC) from launching any new fixed maturity plans for six months.
The AMC was not able to make payment on time for six of its FMPs upon maturity because it invested the money in insignificant and financially handicapped entities of the ailing Essel group. The regulator found that the AMC invested in zero coupon non-convertible debentures (ZCNCDs) of Konti Infrapower & Multiventures Pvt. Ltd.
The Kotak AMC’s case has brought in some of the major flaws in the financial industry. While investors were paid in full in Kotak’s case, this may always not be the case.
Here are some important lessons you can learn from this example and be a smart investor:
Evaluate your risk-taking capacity
The first and foremost lesson to learn is that no investment product is completely risk-free. Even banks have the history of defaulting. Therefore, you need to evaluate your own risk-taking capacity.
Don’t believe what you are being sold
There are no free lunches. The investment advisors will often sell you products claiming it is free from risk. Many fund houses and investment experts position FMPs as an alternative to bank fixed deposits, even though FMPs are not risk-free. Therefore, it is important to do your own research. Before you invest, understand the product and the risk involved in it, no matter how insignificant. Then evaluate can you bear that risk if things go south.
A small extra percentage, often, does not justify the risk
We Indians love the discounts and the extras and easily get lured by a small extra return even when it comes to our investments. As a result, we do not properly understand the much higher risk that the small percentage of extra returns comes with. When your goal is to invest in a safe product – like a fixed deposit, don’t forget an extra 1-2% return will often come with much higher credit risk. Are you ready to take that much risk? If yes, then why not explore an equity product instead of debt?
Do your own research
The only person you should completely trust is yourself and hence you need to do some research before choosing any investment product, including mutual funds.
You have the right to know every detail about the product you are investing in, and you must exercise that right. Ask your advisor everything about the product. Go beyond and check out the website of the mutual fund (or other product in question).
Look at not just the performance but also where is your money going to be invested in and more. Here are a few things to check:
- The portfolio of the fund.
- The concentration of assets; is the fund investing too much in a few assets? That makes it high risk.
- The quality of assets. For debt funds you can check the ratings of the instruments and for equity you can look into the company’s fundamentals and track record.
- The past performance, especially during the market downturns to see how well is your money protected when the market falls.
- Who is the person managing your money and their background and history.
- The fund house history, were they levied any penalties and how serious were the violations
Shruti Jain is Chief Strategy Officer (CSO) at Arihant Capital Markets Limited. She is passionate about investor education and sustainability.