I consider myself reasonably savvy when it comes to managing money and have a diversified portfolio that cuts across virtually all kinds of financial instruments, ranging from equity to debt to NPS, managed predominantly by me, with some help from a wealth-management firm. The only avenue I avoid is real estate, because of its ill liquidity and returns that are more or less on par with other instruments.
I also consider myself reasonably well informed and spend at least a few minutes each day, catching up on financial news, understanding the markets and generally keeping abreast of what is happening in the financial world.
A few months ago, a wealth management firm, XYZ came to meet me. Since I already do business with one, I told them upfront that I was not looking for another firm, but they insisted on giving me a presentation. One of their products piqued my interest.
This was a contract facilitated by the National Spot Exchange (NSEL) that allowed me to loan money for about 35 days, to an end-user, like a farmer, who, as security for the loan, would place an equal value of stock (sugar, grain, etc.) into the godowns of the exchange, for which I would get above market post-tax interest. It seemed too good to be true and so I tried to look for the worst-case scenario, which I was told would be the entire exchange going bust…a possibility that was immediately dismissed from consideration.
I dragged my feet for a few months. I asked around. People had heard of this product, but no one I knew had invested. I asked my advisors who told me they were uncomfortable dealing with NSEL and that it would be best to stay away.
I still decided to go ahead. I signed up with XYZ and in a couple of weeks received all my account details, etc. I was thinking of how much money to put in when I saw a news item saying that the regulators had asked NSEL to stop accepting contracts. I called XYZ and they told me to hold on for a few days because there seemed to be some problem, which was likely temporary and would soon get resolved.
We now know what happened. NSEL is essentially bust, owes thousands of crores of rupees to those who have loaned money against commodities, and at the same time does not have those commodities in its godowns for recovery from those to whom the money was supposedly loaned.
I was saved from losing money only by my procrastination. All my so-called savviness would have otherwise come to naught. Perhaps I would have got the money back, but it would have still been a case of throwing good money after bad.
I choose to believe that XYZ also probably had no inkling of the problems in NSEL and as long as their clients were making money, had not bothered to ask any further probing questions…though one would expect better due diligence from fund managers and those who handle others’ money.
The question is simple. Despite all the knowledge we think we have, how do we really know when we entrust our money to others, either directly or through investments, that it will be safe? The short answer is, we don’t! In the end we rely on our regulatory agencies to give us guidance, on the market goodwill of the product or fund-house and our gut instinct and faith.
And sometimes, as in NSEL’s case, all of these can fail us big-time!