“Financial education is more valuable than money.”
Your secured investment can become unsecured. Yes, do not be under the impression that investment which marketed to you as secured will always remain secure.
The case in study is secured non-convertible debentures (NCD) issued by NBFC DHFL. But it applies to all the secured NCDs.
The debentures are secured by way of charge on assets created by the company in favour of the debentures trustees. Thee trustees hold this charge on behalf of the debentures investors.
The role of the debentures trustees (DTs) as defined by SEBI is to:
- Take possession of trust property in accordance with the provisions of the trust deed.
- Enforce security in the interest of the debentures holders.
- Ensure on a continuous basis that the property charged to the debentures is available and adequate at all times to discharge the interest and the principal amount payable in respect of the debentures and that such property is free from any other encumbrances except those which are specifically agreed with the debentures trustee.
- To take appropriate measures for protecting the interest of the debentures holders as soon as any breach of the trust deed or law comes to his notice.
- To ascertain that the debentures have been converted or redeemed in accordance with the provisions and conditions under which they are offered to the debentures holders.
(The list is not complete but enough for the readers to know the relevant role of DTs).
It is the responsibility of the DTs to ensure the adequacy of the security and yet we see a scenario of DHFL. DHFL NCD investors may be asked to accept hair cut from the interest payable. The board has assured the investors that no haircut would be required in principal amount.
There are many leading groups going through the financial crisis. Under the circumstances investment in even Secured, NCD of companies is very risky. Better credit rating, auditors, SEBI, and trustees no one can save the investors when the company defaults.
Handpicked related post: You Need to Know This Important Concept For Better Decision Making
If you wish to invest in debt instruments, invest in debt mutual funds. These funds invest money in several companies so the risk is spread over these companies.
Company fixed deposits offer a higher rate of interest. These FDs are by nature unsecured in nature. It is riskier than Secured NCDs.
The greed for a higher rate of interest shall not lure you to invest in these riskier instruments. Equity Market is risky that you are aware of. So, you opt for Secured NCDs but these secured can become unsecured at times. You are not 100% secured.
Take a risk when you know its risky, but when you know it’s safe and you invest its shocking to know when it becomes unsecured later on.
Warren Buffet has said,” Risk comes from not knowing what you are doing.”
Handpicked related post: The Risk of Investing in Investment Products You Need to Know
Avoid such investments. Play safe and invest in bank FDs and Govt securities. When you want to take a risk, invest in variable risk mutual funds as per your risk appetite.
You may also like to read: 9 Online Frauds You Need to Know to Avoid Losing Money