In the early 90s, my dad invested with a middleman who promised 18% fixed returns. He also invested a small amount in the FD of a plantation company (companies in the business of growing teak and other wood). The returns were much higher than bank FDs and they were assured.
All was well for a few years till the middleman defaulted and we realized that the money had been lent out to a small time businessman who had gone bankrupt.
We had a tough time recovering the money from the businessman. The saving grace was that this businessman was an honest person and he re-paid as much as he could inspite of his stressed circumstances
The plantation company too stopped paying interest around the same time and when I visited their office, found that they still had a few employees hanging around. They offered me a nice cup of tea and nicely told me that the company had collapsed, and all the money was gone.
All of this happened before I got involved in equities and started investing money on my own.
I learnt a few things early on which have helped me all my life
- The pain of losing hard earned money is very high. I saw my parents suffer emotionally as their trust had been violated. No amount of returns is worth this suffering
- High returns and assured returns never go together. If someone claims so, they are fooling you and you will be out of your money in time
- Do not trust anyone blindly. At a minimum, trust but verify
- With fixed income, go for the safest option. The excess return is not worth the risk. If you want to take the risk ā go for equities or some similar investment. At least you will not be lulled into a false sense of security
- The world out there will prey on you if you are ignorant. You are responsible for your own money
Just in case if I am sounding too smart compared to my dad, let me assure you that I managed to lose even more money over the next few years than he ever did. The difference was that he was cheated whereas I lost because I thought I was too smart and no one could fool me!!
In my case I felt thoroughly deflated when I went to file complaint in Police station (at the behest of my dad ) about failed teak plantation venture !
To this day it lingers
True, i still remember it after so many years. I could see the pain and sadness in my parents. they did not have a lot of savings and it had a taken a lot of time for them to get there. These losses were very painful for them
is this post related to DHFL and Zee/Essel issues in limelight recently ?
No, looking at what is happening with debt funds, i shared my past experience. Its not the same but its bad that people who invested in debt fund with an assumption of safety are facing this risk
True Rohit. One recent incident that comes to my mind. In South India, particularly Tamilnadu, Emu breeding was being promoted as the next big thing. They even named the company after Abdul Kalam, which immediately made some people trust the company. ( association bias!). People invested heavily and there were no consumers of Emu meat so they lost all the money and the poor birds were let to freely roam around. One of my relatives ( young man of 28yrs) lost 3 lacs by playing online rummy game. This money he received it as part of final settlement from the organization he resigned. Initially he gained 500 Rs and lost 5000 Rs. To recover this he kept playing until he lost 3lacs!
Hi Rohit, I have moved to debt funds to move away from actively managing equity.
Are you saying that Debt Mutual Funds can also default? e.g. https://www.utimf.com/mutual-fund-products/debt-funds/uti-corporate-bond-fund/
When a company defaults/ files for bankruptcy, arent the debt holders the ones who get the money first after selling the companies assets?