Archive for March, 2018

Rahul Dravid – Return of capital vs return on capital part 2

Last week i had written about some fraud investment scheme had promised sky high returns and conned many in Bengaluru, (http://blog.credocap.com/?p=467) turns out that the celebrities who lost money included the likes of Rahul Dravid, Saina Nehwal Prakash Padukone  etc.  As per reports they were promised upto 40% returns but did not get even their capital back ! The lure of return on capital blinds us to forget return of capital !

Seems Dravid had invested the amount 35 crs 3 years back today his complaint is that the firm owes him 15 crores in capital, the chances of recovering the money appears slim. Let us for arguements sake assume that he had invested the same 35 cRs in boring equity MFs 3, 5 and 10 years back. Taking the average return of 7.5%. 15% and 10% over last 3,5, & 10 years respectively we can see that the equity fund returns have not been that great ( 10% for 10 years ?? i can see people asking in disbelief).  Mints Expense Account column did an article with similar bent recently though on a totally different topic ( see here https://bit.ly/2IKvvJQ )

Amount Invested 35 Cr
No of years Returns (Large Cap Equity Funds average)
3 7% 42.87 Cr
5 15% 70.39  Cr
10 10% 90.78 Cr

At a not so great return of 10% the initial 35cr has become 90 Cr, Yet instead of this simple and well regulated form of investing, what was chosen was a high return get rich quick scheme that seems to have promised 40% return on capital but today many high profile celebrities are getting only 60% of their capital returned and 40% gone ! ( though they may get some of it back, it will be a long wait likely)

The tragedy of this story is that most of the celebrities involved can afford good lawyers plus they have other sources of wealth to tap into, which small investors who get sucked up in schemes like these dont have.

Would be better if investors focus on known risks (such as in equities) and get rich slowly rather than invest in get rich quick schemes that seldom give return of capital !

Happy weekend,

 

 

 

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Return of capital vs Return on capital

As investors our focus should primarily be on return of capital ( can we get our money back)  but we tend to focus more in return on capital (what is the % we will get !) Tell someone to put his entire wealth in equities and they would shudder in horror, what happens if the markets crash would be the question. Which is why we dont put everything in equity but some in safe options like PPF, FD or even bond funds.  This is sensible especially for a first time investor, but as we mature as investors, some of us may be fine with high equity allocation as the capital itself grows in equities the most. These investors understand that equity is a rocky boat but are fine with it since it is the boat that creates wealth.  So, equities create wealth but with risk involved, debt safeguards wealth but with low returns and high taxes.

Trouble starts when we want high returns with low risk !  Which is what seems to have happened recently in Bengaluru ( https://timesofindia.indiatimes.com/city/bengaluru/cops-put-fraud-size-at-rs-400cr-for-now/articleshow/63291147.cms) where in people were lured into high returns ‘safely’. So these investors gave money to someone who advertised himself as commodities trader, investment consultant etc promising very high returns, and like all good MLM Ponzi schemes they paid the high returns for old investors from new investors capital 🙂 this continued till one day they shut shop. The people affected seem to be big businessmen, doctors, sports professionals etc, but no one seems to have asked any questions about whether the investments were regulated, the company had license etc. Even with all of that the high returns promised should have raised an alarm but no, in fact the high returns seems to have made the gullible blind into investing with out checking anything at all. This is not the first time, though, and will not be the last time.

Return on capital ( interest, growth etc) is very important, but return of capital is the most important thing. After all the capital is what one has worked and saved over a long period of time.  Being lured into unregulated investments, MLM Scams, etc may give high return on capital initially but chances of geting your capital back is almost nil.

 

 

 

 

 

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