How to safeguard your money in risky times and always

If you thought debt funds were a bad idea earlier this year, then the DHFL saga in June 2019 would have given you a shock about corporate deposits. If you then consoled yourself saying there are still banks, the PMC Bank episode would have broken that thin confidence left.

After the PMC Bank episode, a friend of mine mocked that even equities look safer than banks as they can at least be liquidated any time. But he said it too soon as the plight of the risk-takers in the equity world just got worse. For no fault of theirs, equity investors who had a broking account with Karvy Broking are now left wondering if they indeed hold all the shares they actually own.

Did you know?

Who would have thought a marquee lender of home loans like DHFL, that too, several decades old (don’t tell me you don’t trust vintage), would have reached the endgame, going into bankruptcy? Did you know that NBFCs gave loans to you for a longer time frame (like home loans) but borrowed money for shorter time frames from large institutions? Did you know this can lead to what is called asset-liability mismatch and can spell doom when the money tap from such institutions suddenly run dry?

And the NBFC can become bankrupt when it is unable pay back its shorter-term borrowings because there is no fresh money (à la Ponzi)?

Or, did you even realise that having ₹1 lakh as bank deposit insurance (yes, PMC Bank has it too) means nothing because you can’t get your money when you want? The insurance kicks in only when a bank goes into liquidation.

The insurance cannot help when you need to withdraw for your monthly needs.

Forget the poor depositors and savers. If you consider yourself smart and are therefore investing in equities, did you know that the power of attorney you give your broker can be misused, to move/misappropriate your shares and even pledge them for the broker’s own needs? This is what allegedly happened in the Karvy Broking case.

It is simply not possible to predict events such as these. So, you can only do what is in your control — that is, stick to the basic principles of investing diligently. Here are some of them.

Diversify

If you have deposits in co-operative banks, or are testing waters with small banks, make sure you do not park a chunk of your savings and investments there simply because interest rates are higher. You need a large public or private sector bank to add to it. If you are already with a large private or public bank and hold several lakhs, consider holding additionally in any of the domestic systemically-important banks (identified as SBI, HDFC Bank, ICICI Bank, by the RBI) to keep some emergency money. These banks are supposedly too big (whose assets account for more than 2% of GDP) to fail. That also means if they do fail, the government is expected to act; failing which the entire financial system can collapse.

If you are a regular corporate deposit investor, diversification matters much more. While the recent event of DHFL may have shaken your faith in the system, in general, NBFCs have higher disclosure norms than companies. The additional disclosures they are required to make with respect to liquidity and asset-liability mismatch (please do your reading about this, there is no other choice) provides some cues. The credit ratings alone won’t do any longer.

As a general thumb rule, if you are a senior citizen needing regular income, invest first in post office, Vaya Vandana Yojana and RBI bonds before jumping into corporate deposits.

And in general, for all corporate deposit investors, a time frame of over three years is risky as it is hard to predict what can happen to even a sound company.

It is better to take out your money and reinvest (not withstanding the risk of lower interest) than losing it. Remember, corporate deposits are unsecured, and you will not have first right when a company goes defunct.

Some checks

If you are a demat account holder, you don’t need multiple demats, you only need to monitor carefully. Make sure your broker has a process of regularly communicating with you on your settlement. Regularly open the e-CAS statement mails you receive from NSDL or CDSL or open an account with them to check if what is reflected there matches with your brokerage account. In case of any discrepancies, write to the depositories and the regulator SEBI through SCORES.

With all this too, your money may not be safe.

You only reduce your risk. I had a neighbour commenting that it was so much easier when people invested in real estate instead of complex financial products. My reaction was: What was DHFL into? How did PMC Bank lose? Where did the pledged share money from Karvy Brokers go? And real estate is a haven indeed!

Date: 08/12/2019/ Source: The Hindu