In an slowdown, marked by crisis of confidence in the Non-Banking Finance Companies (NBFCs) and one or two small private sector banks, market rumours are playing havoc with investors. However irrespective of how savvy or calm investors you are, ignoring these rumours despite saner advice is not easy and not even safe. You have got to check it out. Not all investors are smart enough to be diversifying their portfolios to mitigate risks. In fact,majority of us , the investing class is a simpleton lot.
Having witnessed a large scale frauds by ponzi schemes, small investors mostly turn to banks, parking their hard-earned savings in Fixed Deposits Receipts without realising that within the class of banks, there are black holes. It is quite natural and not really irrational to get lured by higher interest rates by a few percentage points among different banks, as long as they are 'banks' with multiple branches in multiple cities. But then, to the shock of unsuspecting depositors, these banks could turn out to be the likes of Punjab and Maharashtra Cooperative Bank, which sucked their life time savings and now being groped by the RBI inspectors.
With slowdown in GDP growth to 4.5 per cent for the second quarter of FY20 and the RBI scaling down its projections to 5 per cent from its earlier forecast of 6.1 per cent, the overall ecosystem is getting negative with the government along with RBI facing an opposition flak. Even though the stock market has merrily overlooking these ominous signs, the moment of reckoning seems to be approaching. The worst fall-out of such a scenario is a flurry of rumours, which can be general in nature ; more dangerous are those which surround a particular company , bank or an NBFC.
What should you do if you are a depositor with an FDR in a bank, which is perceived to be vulnerable or a cooperative bank? Following steps must be taken, without really creating a 'run on a bank' kind of a situation.
Walk into your bank branch and break the FDR, ignoring advice to the contrary by the staff. Once the money is in your savings account, transfer a sizeable part of it to another bank. Most of us have multiple bank accounts , which is perfectly legal as long as the data is there in your Income Tax Return. Even in a situation where you do not have multiple bank accounts, money can temporarily be transferred into the account of your spouse , son or daughter. Such inter-family transactions do not cause much of taxation issues either. The idea is to divide your risk profile.
What should you do if you are a small investor in the stock market? In such a case, you are a bit smarter than those who only play safe into bank FDRs, presumably so. You would be faced with rumours on social media around particular stocks day in and day out. The best course would be to go the BSE or NSE web site and check whether your company has given any filing to the stock market. If yes, go through it carefully and then google authenticated news about it. Rely only on established news sites or TV channels. If you feel the risk is real which may be emerging from a event that could vary from an adverse court ruling to takeover bid or a regulator slapping fines, stop your loss and get out of it; but only after the due diligence as suggested. Do not just press the panic button. Also, there is no point being emotive about your stock and expecting it to revert to the level of your purchase price.
Moreover, there are a few sectors which are perennially risk prone in the current environment. These are telecom despite raising of tariff, power generating and distribution firms, steel, sugar, and of late the automobiles. Avoid them and get into safer bets of healthcare (no pharma, no hospitals), consumption baskets, big and established names in private sector banks and consumer non-durables.
More than the sectors, if you are an investor in the stock market, you should profile the behaviour of the promoters and management of your company. Investors have become extra sensitive to any mis-demeanour in corporate governance. Rumours around corporate governance issues should rather be taken seriously.
So, as they say Jago Investor Jago - It is your money. Those having FDRs in banks should equally stay alive as should be the case with the investors in Mutual Funds. Keep watching the portfolio of your MF and see whether your fund managers have got undue risks in B or C grade companies , both in debt or equity.
So, as they say Jago Investor Jago - It is your money.
The author is a Delhi-based senior journalist