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 ---
The Smallcap Revival Summit

Join us on the evening of 28th January to learn,

• Why despite rallying over 100% since March-2020 lows... small-cap stocks are set for a massive rally over the coming months and years
• Details of our top 3 stocks to capture potentially huge gains from this upcoming small-cap rally
• And how to spot opportunities, even in the current market, with potential to generate 200%, 400%, and even 900% long-term gains

Plus there is a lot more that we are going to cover.

The summit is free to attend for Equitymaster readers.

But since there are limited seats, we would recommend you to register at the earliest.

Click here to register. 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?

BREAKING: Full Details of the #1 Investment of the Decade...

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 ---
Top 3 Stocks for 2020 and Beyond

We've uncovered 3 high-potential tech stocks after years of research.

These 3 cutting edge tech stocks could potentially create a wave of Indian millionaires.

First one is present in the sector which is expected to GROW over 300 times by 2030.

Second one is one of the leading players in Artificial Intelligence technology.

And the third one is involved in putting up a global safety net to save the world from cyber criminals.

These 3 tech stocks have the potential to offer life-changing gains in the long run.

Click here to get the details...

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

Unmatched Returns from a Secret Segment in the Stock Market January 18, 2021
I'll reveal a powerful profit opportunity which is unsuitable for 99% of investors!
Smallcap Stocks: Your Best Bet for 2021 and Beyond January 15, 2021
The pandemic failed to thwart Richa's investing success formula for 2020.
Investing in Smallcap Stocks in 2021 January 14, 2021
Here's why I believe there is a lot more steam is left in the smallcap rally.
Why I Follow Richa's Cues on the 2021 Smallcap Revival January 13, 2021
The pandemic failed to thwart Richa's investing success formula for 2020.

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