Important investment lessons for Rahul Dravid
Who doesn’t want to earn higher returns? Every rational person would want the highest possible returns. But every rational person must also realise that high returns come with higher risk. Former Indian cricket captain and now coach of the under-19 Indian cricket team Rahul Dravid, recently discovered risk in his high-return portfolio. He recently lodged a complaint against Vikram Investment Company for cheating him of ₹4 crore.
According to reports, the company had promised him a 40% return on investment. The company, Vikram Investments, has allegedly lured high-net worth investors with offers of 40-50% annual returns on their principal.
Dravid should have paused at this return number itself. A 40-50%-guaranteed return itself is a red flag. No wealth management company or financial planner can assure you of such a return. “Usually, it is not possible to get such a return. The basic principle is — as your returns go up, your risk goes up too,” said Abhay Aima, group head-equities, private banking, third-party products, NRI and international consumer business, HDFC Bank Ltd.
Why then do fully sane and rational people fall into this trap? Financial planners and wealth managers attribute it to three deadly sins of money — gullibility, ignorance, and greed.
Experts say that most people are extremely gullible. “Someis times, the person who is selling a product is a good salesperson. It could also be because you have blindly decided to trust someone without checking the details and verifying the authenticity of it,” said Aima. He explained with an example. Say, someone you know has generated that kind of high returns. You will feel that the same can happen to you as well.
Ignorance and lack of interest in understanding the product and company you are investing with, can also lead you to a bad money trap. “Most people don’t ask what the driver of the underlying returns? You should never go by past data if it is a short term one. In the initial phase, there would be some people who would have received outcome in line with what has been promised. You have to look at rolling data. See if the product has consistently performed well or not,” said Vishal Dhawan, a Mumbai-based financial planner.
The basic question to ask is: if your capital can double every two-and-a-half years, why would your agent or wealth manager not invest her own money here? Why is she helping you?
Another way to validate information is to see the top returns that the best investors have delivered. “Check what the world’s best investors have delivered. One takes Warren Buffett as the best example. His performance has been in the 20%-per-year range. You need to ask: What is so special about this strategy that it is delivering twice of what Warren Buffett has delivered?” said Dhawan.
If you are wondering how to evaluate based on returns, here is the thumb rule to follow. “If it is debt, you should look at a return of 8-9%; if it is equity, take a benchmark of inflation plus GDP,” said Surya Bhatia, a New Delhi-based financial planner.
Had Dravid been a mutual fund investor, what would his portfolio look like today? An average large-cap fund would have given 3-year returns of 7.31%, and 5-year returns of 14.47%. It is good to look for avenues to invest and grow your wealth. But tread cautiously and don’t get trapped into products that are too good to be true.