How Does One Really Ever Know!

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!


  • Dear Bhavin,
    Sometime back, a got a mail from a friend,giving a story about an investment advisory company: It is true for almost all these companies: Read on:
    Once upon a time in a village, a man announced to the villagers that he would buy monkeys for Rs 10. The villagers, seeing that there were many monkeys around, went out to the forest and started catching them.
    The man bought thousands at Rs 10 and as supply started to diminish, the villagers stopped their effort.
    He further announced that he would now buy at Rs 20. This renewed the efforts of the villagers and they started catching monkeys again.
    Soon the supply diminished even further and people started going back to their farms. The offer rate increased to Rs 25 and the supply of monkeys became so little that it was an effort to even see a monkey, let alone catch it!
    The man now announced that he would buy monkeys at Rs 50!
    However, since he had to go to the city on some business, his assistant would now buy on behalf of him.
    In the absence of the man, the assistant told the villagers, “Look at all these monkeys in the big cage that the man has collected. I will sell them to you at Rs 35 and when the man returns from the city, you can sell it to him for Rs 50.”
    The villagers squeezed up with all their savings and bought all the monkeys.
    Then they never saw the man nor his assistant, only monkeys everywhere!

    Welcome to XYZ Wealth Advisors, the Investment advisory firm

  • Sujata Morab wrote:

    Unless one is bitten once, he will not be shy twice !
    If you have money, it is safer to let it lie in the bank or convert to FDs. At least it can be liquefied anytime you want. The current market volatility is not good for our financial health and also physical health.

  • Ajay Bhonsle wrote:

    Dear Bhavin,
    You mentioned that you have a diverse portfolio in most financial instruments except real estate. I was also of the same opinion and I sold of a piece of land in a city 25 years ago for about Rs 30/sq ft to a friend. On meeting him recently he mentioned that he was thinking of redeveloping the same property where the land alone would command a price of at least Rs 6000/sq ft.The appreciation was 200 times in 25 yrs! None of my other investments had fetched me that kind of returns! So I have started questioning OUR funda of staying away from real estate!! I did dabble in commodities till I observed that it was middle men (and I would also be one of them), who were speculating and making money at the cost of the poor farmer.

  • Bhavin Jankharia wrote:

    Ajay. That is a decent return. But a similar investment in ITC for example, in 1987, would have given you equivalent results.

    Also, selling a piece of land is what you do at the time because you need the money or you’ve made an equivalent profit from the time you bought. It makes no sense to calculate the notional loss after you have sold. The same thing happens when you sell a stock after making 3 times and it zooms another 3 times and you feel you’ve lost that money. It’s not. You have to book your profit when the time is right because you never know what will happen in the future.

  • laxman G.S wrote:

    I appreciate the views given by Natu& Sujata Morab.There are bogus schemes from NBFC and schemes like NSEL.The hard earned money from public vanishes in no time because of greed from certain investors.Be it Stock market,Real Est or MCX or ETF (gold)The risk is very high as ROI is not defined.Where as FD,LIC or Govt bonds ,PPF ,NSC the investment is safe.Even Mutual fund the return is negative.

  • Ha! Ha!
    You should have asked friends from Financial Services Industry about Jignesh Shah and you would have known immediately as to what you should have done.

    Not all Gujjus are good!

  • Bhavin Jankharia wrote:

    Which is what I did. Most told me not to touch Jignesh, but the product at the time seemed to make sense.

  • Amit Thadhani wrote:

    Dear ajay
    No doubt real estate is lucrative as an investment but as bhavin rightly points out, it doesn’t give any more returns than other investments. The reasons being:
    1. The buyer doesn’t calculate the cost of maintaining the property, stamp duty, registration, taxes including the long term capital gains etc. In no other investment does one have to pay to maintain the investment.
    2. Consider this: in Navi Mumbai, property rates increased 7 times from Rs. 1000 to Rs. 7000 per Sq ft in ten years from 2002-2012. In chembur too, rates increased from Rs. 4000 to Rs. 25000. Astronomical? Hardly, when you consider that gold too increased from Rs 4000 to Rs. 30000 per 10g in the same period and so did silver, without having any of the consistent expenses that one pays for real estate such as society bills, electricity, water etc etc.
    3. Real estate is much harder to liquidate. It may take months for the sale to be concluded whereas other investments can be sold across the counter without a waiting period.
    4. Most of the time, real estate is purchased on loan instalments. While calculating the value of the property we seem to forget the heavy component of interest cost that has been added which negates the gains being made to a large extent.

    Therefore Bhavin is quite right that real estate is not a very attractive modality of investment if considered purely on its merit. The only single advantage is that one gets a large chunk of money at one time on sale. But other than that, it is not different from any other concrete investment.

  • The financial world is full of Sharks and Crocs waiting to swallow our hard-earned money in a very swanky style and manner. Nobody or Nothing is worth as compared to Bank and an Estate. The media – News Papers are flooded with such articles from thugs of this Sector. And they do it because that is the ONLY thing they know-Just Beware. It is always the Smallest Fine Print that gives the Loudest Message.

  • In fact, I have found real estate is very good surety based investment that gives fantabulous returns. It’s better than SIPs.
    This is not the forum to discuss any further. But if people want to discuss, I am game. I run management consultancy on real estate called realval. It’s primarily targeted towards developers and not customers. Also I am not in brokerage business. So you can freely chat with me.
    Your readers are usually like minded and sharp witted fellows so would be glad to share the fundamentals of investing in real estate portfolio. And yes… I also don’t run wealth management service.

  • I bought a flat in malad @16 lakhs in the year 2005 which is now fetching 1.2 Cr.I paid 10%interest on 8 lakhs for 5 years & 8 lakhs put from pocket.No rental income from the property.average out going per year(maintainence,etc…)Rs.40,000/-Can any one tell me was this a good investment or bad?So far i believed that i did the right thing in 2005.can anyone prove me wrong or break the myth of property investment?

  • Bhavin Jankharia wrote:

    Quick calculation to estimate actual cost of the flat
    8 lakhs – your own money
    5.1 lakhs – loss of interest on your own money @8% for 8 years
    8 lakhs – loan
    4 lakhs – interest paid on loan for 5 years
    1.9 lakhs – loss of interest income on your loan money for the last 3 years @8%
    3.2 lakhs – maintenance
    9.6 lakhs – loss of income on rental @ a conservative Rs. 10,000 per month for the last 8 years
    This works out to a cost of Rs. 39.8 say Rs 40 lakhs, probably more given that the rentals would have been higher, so say around Rs. 45 lakhs.

    Your returns work out to between 2.2 to 3 times in a period of 8 years.

    You essentially get back Rs. 75 lakhs minus the original 16 comes to Rs. 59 lakhs
    So in essence an investment of Rs. 16 lakhs has given you Rs. 59 lakhs back

    A decent equity exposure to say HCL Tech or ITC would have more than quadrupled your money. More than that, the money would not lie illiquid – if you have money that you definitely don’t want to touch over 8-10 years then it is worth putting into real estate predominantly in Mumbai. In other areas of the country, the appreciation is much less.

  • Bhavin Jankharia wrote:

    I forgot to add the cost of registration, stamp duty, etc to be paid both times – at the time of buying and at the time of selling.

  • Ajay Bhonsle wrote:

    Sorry, my comment veered the discussion away from NSEL to real estate! But the points & counter points were educative to say the least! Waiting for Friday!

  • An old Jew was advising his son on his death bed. He said “son always invest in land. Because land can never grow and will always be in demand as population increases.

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