Mutual fund houses have been aggressively pushing these plans to layman investors promising safety of capital and predictable returns. What can go wrong with these supposedly AA or AAA rated entities?

As it turns out, many!

The past week, Essel Group of companies (Zee) defaulted on the repayment of principal on its debt that had been subscribed by many FMPs including Kotak MF, HDFC MF, Aditya Birla and ICICI Prudential. The FMPs were in turn palmed off to layman investors whose capital is now at risk. They will either not be repaid or repaid with a delay, which will significantly impact IRRs on the investment.

As per reports, close to Rs. 1,400 crores of such instruments are in default risk. As an investor how does one avoid such a risk?

Invest only in debt issued by the Government of India or at worst AAA rated blue chip companies, which form part of the index like Nifty50 or Sensex 30. The difference in yield between these securities and FMPs are in the tune of 150-200 bps, which is not commensurate with the risks involved. Avoid getting swayed by “sales speak” of the fund houses who will use all manner of past performance to get you to invest in them.

Invest in Fixed Deposits. While they are often seen as “boring”, fixed deposits are relatively secure investments especially when done with Tier I banks. Avoid cooperatives and Tier II banks.

Invest in hard assets like real estate where capital protection is afforded by the real estate underneath. A property will not go bankrupt like a company. There will always be a buyer for it. Yes, the value may fluctuate and sale may take time, but capital is not entirely at risk.

Author: Kunal Moktan – Property Share – Apr 12 2019

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