Do you want to really lock in your money?

When your NW is R4 crore –and you are still building a nest egg does it make sense to lock up (and eventually lose) 15% of your portfolio?
Do you want to really lock in your money?

There is a big lure of investing in asset classes which have a degree of being difficult to access, and exclusive club privileges. Whenever a person is approached by a good marketing team selling things like private equity, high end unit linked plans, PMS, AIF, they have adequate budgets to guile you into signing the cheque.

I met a man who wanted to invest R1 crore in a private equity fund raising. This fund was being run by a person with a lot of qualification and was raising money for 7 years –with a clause saying it could be delayed by say 3 years. So this money was going to be locked in for 7 to 10 years.

His net-worth was R4 crore and he already had R50 lakh in a PMS(Portfolio Management Service). I asked him to find out the status of that investment. He was gung ho about it. However, what he heard was bad news. The fund was stuck and he would be lucky to get 70% of the money over the next 3 years. So it was a case of 7 years –with negative returns. When your NW is R4 crore –and you are still building a nest egg does it make sense to lock up (and eventually lose) 15% of your portfolio?

NO. It makes no sense at all. Who are the people who should invest in schemes where money can be locked in for a decade…

  • High net worth individuals – those who have at least R10 crore, have met all their goals have enough money for retirement.

  • Invest not more than 10% of your net-worth IN ALL SUCH ILLIQUID SCHEMES like unit-linked plans, PMS, AIF, Private equity, small cap funds, credit risk funds…all put together.

  • The money you put in has to be money that you can afford to lose.

  • You should know the fund manager either directly or through your friends

Who are the people who should NOT put money into such schemes:

  • Those with a net-worth of about R5 crore or less 

  • Those who can’t afford to lose R50 lakh–emotionally and physically.    

  • Those who have immediate goals and need a standby fund just in case something goes wrong  with the normal markets.

I am not against private equity, PMS or AIF – I am myself an investor in some of these products. I am just saying who should invest and who should not. I recently saw an investor lose a lot of money in a real estate PMS. The persons who sell these products invite you to a nice 5-star property along with your family. They start by saying that ‘SIP in mutual funds is for the lower end people, not for people like you who are HNIs’. This floors the investor and his family and they are also now convinced that since they have R 80 lakh lying in their bank account. Now it becomes easy to issue a cheque of R50 lakh.

The question is not ‘whether you can afford to sign the cheque…it is whether you should..’

The answer is very simple – you shouldn’t.

PV Subramanyam
writes at www.subramoney.com and has authored the best seller ‘Retire Rich - Invest C40 a day’

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