Lesson for Investors from the Lakshmi Vilas Bank Fiasco

Nov 19, 2020

It was a typical lazy Sunday evening.

A friend of mine suggested we go for a small ride nearby for coffee. Since I wasn't that occupied, I tagged along.

These days small outings like these feel good. Specially after being almost locked in for the whole year due to Covid-19.

As we were sipping on our coffee, my friend's attention wandered to a large board in front of us. I saw it too.

It was that of a small finance bank offering 9.25% on fixed deposits (FDs). My friend's eyes lit up.

He instinctively asked me, 'Isn't this a great deal? My HDFC Bank offers me a paltry 5-5.5% interest rate for my FDs. Doesn't it make sense to switch and move my FD to this small finance bank'?

--- Advertisement ---
India's #1 Defence Stock

Our co-head of research, Tanushree Banerjee, has uncovered what she calls India's #1 defence stock.

She believes, this stock is primed for an unprecedented rally in the coming years.

It's a potential 10x opportunity in the long run.

Tanushree is confident about the potential of this defence stock because the Indian government has made a major change in the defence policy.

And as a result, a flood of money could start flowing to a handful of Indian defence companies.

It is estimated that over the next 5-7 years itself the opportunity is worth over Rs 4 lakh crore.

Tanushree believes, the defence stock which she has uncovered is well-positioned to benefit immensely from this windfall.

Tanushree will reveal more details about India's #1 defence stock at her upcoming special online event.

This event will go LIVE at exactly 5pm on November 30.

Seats for this event are filling up fast. Since there are limited free seats, we urge you to block your free seat at the earliest.

Click here to sign up instantly. It's free.

I had to explain to him in detail about why there's a difference between parking your money in an HDFC Bank or a Kotak Mahindra Bank versus a small finance bank.

There's a big risk of losing your entire principal amount for that 2-3% extra return. I then asked him if such a risky deal was attractive.

We saw this risk play out with the Lakshmi Vilas Bank this week.

The RBI has placed it under moratorium for 30 days. Withdrawals have been capped at Rs 25,000 for 30 days.

While depositors have been assured that their money is safe, is it worth the stress though? Wouldn't their money have been safer in another bank?

Back in May last year, we had warned our readers about this bank - How We Avoided a 60% Loss in Lakshmi Vilas Bank.

The risk applies not only in FD investment but in the Indian share markets as well. Investors tend to only look at returns and completely ignore the risk.

This is the first question that an investor should ask...

Is there a chance of losing my money completely?

New: 5 Pandemic-Proof Smallcaps You Should Know About...

If yes, then it's better to avoid the company irrespective of the return it promises.

The chances are 9 out of 10 times; you will lose your money in such companies.

If you manage to protect your capital, returns will take care of itself. Follow these few basic checks to avoid such situations...

  1. What are the chances of a company going bankrupt? Is the company debt way too high? In case the company is not able to generate revenues in the short-term, will it be able to pay its interest on debt?

    We saw this situation play out this year due to the Covid-19 crisis. The best option is to avoid such companies.

  2. Despite your checks, you might end up with a bad company. It happens to everyone. How do you safeguard your portfolio against such risks?

    Asset Allocation is key here. Even an 80-90% loss on 1-2% of your portfolio won't affect your returns much. But an 80-90% loss on 20-30% of your portfolio will have a big impact. Avoid taking large positions where you feel the risk is too high.

We've been doing the same for our Hidden Treasure subscribers in a post Covid-19 world.

--- Advertisement ---
Mega Panel Discussion on Asset Classes of Equity, Debt & Gold

Date: 27th Nov | Time: 6pm | Venue: Your Computer

– What is the outlook for each asset class as of year-end?
– What is the suggested asset allocation between Equity, Debt & Gold in the current market scenario?
– How important is it to diversify investments with the help of Multi-Asset Funds?

Register FREE for this upcoming webinar here

Subscribers would've noticed that we've been focusing on low debt, low risk, quality smallcaps in our recent Hidden Treasure recommendations. These are businesses where don't have to lose sleep on them going bust.

The next time you see an advertisement of an unknown bank offering high returns, you know what to do.

Remember, return of capital is much more important than return on capital.

Warm regards,

Girish Shetty
Girish Shetty
Research Analyst, Hidden Treasure
Equitymaster Agora Research Private Limited (Research Analyst)

PS: Get the best smallcap stock recommendations as a premium member of Hidden Treasure. Sign up here.

Recent Articles

The Huge Wealth Creating Opportunity in Defence Stocks November 26, 2020
Recent developments in the defence sector look very promising.
Not Infosys or Wipro. India's Next Wealth Creators Could Be Drone Stocks November 25, 2020
India's drones directorate signals the next big defence tech multibaggers.
Smallcaps: The Rules of Investing Are Changing in Your Favor November 24, 2020
A new regulation could be a big game changer. It could empower common investors, given the structural advantage in the smallcap space.
Is this Sector the Best Contrarian Bet Right Now? November 23, 2020
The risk reward ratio in this beaten down sector may have finally turned for the better.

Equitymaster requests your view! Post a comment on "Lesson for Investors from the Lakshmi Vilas Bank Fiasco". Click here!