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Photo: Mint
Photo: Mint

Opinion | The Hoffland ‘Redemption’ and the face of risk

The worst risk to your money is the risk of somebody running away with it

We don’t hand over our wallets to a person who asks for it. In fact, we would rather die resisting a mugging. But when the same robbery takes the garb of an attractive investment or a phone call asking for details we should not give, we hand over our wallets and bank accounts to the white-collar robbers ourselves. A cousin visiting last week shared that a part of the money his now-deceased father had invested in Hoffland Group had come back. That comment took me back two decades when my recently retired uncle was in the process of investing a part of his retirement corpus in this “superb" scheme that promised annual returns between 18% and 27%. State Bank of India’s five-year fixed deposit (FD) was giving a return of 11.5% in 1998, making this deal seem too good to miss. It turned out to be too good to be true.

I remember telling him not to go for the deal. That any deal that is so good is usually bad. But the firm had built confidence by hiring retired defence officers to get their friends and colleagues to invest in these deposits. To show the commitment, the firm gave post-dated cheques with the return for the term of the deposit. And as in a typical Ponzi scheme, the first round of investors got the returns and their money back, making the deal seem real. Over 100 crore of household money went into Hoffland Group’s fraudulent Ponzi schemes and when the bubble burst, there was plenty of heartburn but no quick recourse. The Hoffland owner was arrested a few years later and the courts ordered the sale of assets to pay back depositors. Now, more than 20 years later, a fraction of the invested money is back. It is unclear how much has actually come back, but even if it is as much as half, the value of that money is now worth much less due to inflation. If 1 lakh was invested and 50,000 came back, the value of that money is about 15,000 using a conservative number for inflation.

For Hoffland Group depositors who had given up on the money, the letter from the chartered accountant appointed by the Delhi high court executing the 2011 order to liquidate assets to pay back the money has come as a bonus. But had that money been invested in a broad market index instead in 1998, that 1 lakh would have been worth about 14 lakh today. As investors, we tend to gloss over our mistakes and don’t count the costs of lost opportunities. We also don’t see the real face of risk. I remember many conversations with family elders over the years who are dismissive of my stock market investment advice because of the risk. But the same people happily invest in teak farms, emu farms, dubious deposit firms and other highly risky investments.

When we invest, we need to see the risk for what it is and not be swayed by stories of risk. The worst risk to your money is the risk of somebody running away with it. Why do you think government bonds offer the lowest interest? Because the risk of a government not honouring its debts is zero, except in the case of sovereign defaults where the money lent to the government does not get returned. The government in India has used inflation to reduce the value of its debt, but has not defaulted on its debt, making sovereign guarantee trusted. The interest offered on a deposit is directly proportional to the risk. The lower the risk, the lower the return; the higher the risk, the higher the return. What risk is this? The risk of not giving the promised interest and the risk of not returning the principal. A simple way to gauge the riskiness of the deal is to compare it to the SBI FD rate and see how much higher the good deal is offering. Anybody offering you double of that rate should be seen with suspicion.

But how should you think about the risk of the stock market? The stock market does not give you a fixed return—it gives you a share of profits. The risk is of choosing a company that does badly and losing your principal invested due to poor performance. The big IPO scams of the 1990s were also part of the risk of dubious entities raising money from the markets and vanishing with it. IPO investing remains one of the riskiest, yet money poured into the Reliance Power issue in 2008 at 430 a share at a hefty premium; the issue got subscribed some 70 times. Today the stock trades at 1.75. Warnings to eager investors again had fallen on deaf ears due to the hype and the high incentives given to the brokers to get the money from the households. It is taking time, but the Indian investor is gradually discovering that investing in a basket of stocks through the mutual fund route is much safer than punting in IPOs or penny stocks.

The lesson from all the scams and tricks of the past is just this: scams change their form but not their basic intent—to cheat us out of our money—and we need to be smart. Stay away from deals that sound too good to be true. Understand the true face of risk. Manage your expectations. And don’t mix emotions of greed, fear, self worth and ego with your money. Meanwhile, I’m going to nudge my aunt (wife of the deceased uncle) for a treat for the money she’s going to get as the Hoffland “Redemption" and to celebrate the fact that she now works with a conservative financial planner.

(Monika Halan is consulting editor at Mint and writes on household finance, policy and regulation.)

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