8 Lessons from The curious case of DHFL!

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DHFL – one of the darlings of the market over the last 5yrs has been demolished and how!

So without going into the reasons behind it (we get to know the real details may be 6 months from now), let us see how we could have seen this coming and lessons we must learn.

1. Forever long on equities is not the way forward

I know a lot of people who are forever long on Indian stocks or NSE index or in mutual funds. This is the biggest mistake you can ever make – being forever long on an asset class or sector.

Yes if you would have held onto Wipro or Infy since 1991 today, you would have been a $ terms millionaire. But how many people you know achieve this? I see a lot of people who destroyed their wealth holding onto to shit (I still hold Suzlon that I bought in 2007 😂)

Always. Always. Always look for indicators

2. SIP

The fact that you do SIP in the 5-star fund doesn’t mean the tension is over and retirement is done and dusted.

Always check the top holdings of your mutual fund and check for concentration risk.

Concentration risk becomes even more critical in debt funds because the Indian debt market is not deep. Funds have nowhere to park the money, and they end up buying the same or similar paper again and again and again!
The result is fund starts to hold over 10-15% of papers from the same company of different maturity.

3. Debt funds are safer

Nothing can be farther from the truth. Fixed income securities are a beast and a beast that is very tough to manage. Avoid this beast unless you know what you are getting into.

With the shallowness of the Indian debt market, debt funds are very very risky.

If you love fixed income, put money in PPF or EPF. Please, avoid debt funds. They are not as safe as you think.

If you don’t believe me – google this “Risk associated with fixed income securities.”

4. Keep your eyes opened for DHFL like issues

For a change, I saw DHFL thing coming. Yes, it is easier to say this now but think about this news I read last month. It is a different matter that I missed making money off this and trust me. I am more pissed with myself than the person who lost money in the debt fund today. (Read more on this)

The company had stopped fixed deposit withdrawal. That is as big a red signal as it comes.

If you have a stock, keep notification on for that stock on your phone. You tend to get these indicators, and they provide you enough hints!

5. NBFCs

A sector leads every market rally and, once that rally ends, that sector gets demolished to never rise again for years.

Infra in the mid-2000s
Pharma in the early 2010s
IT in the early 2010s
Auto in mid2010s
NBFCs in 2014-17

The NBFC story is more or less over. Regulators will come heavy on them. Avoid this sector for the next few years. If you have made money on these, book the profit. DO NOT LOWER YOUR AVG COST!

6. Banks

I don’t know where Indian markets are heading. The growth can’t come without credit, and with ILFS and DHFL, banks will have to take a massive haircut. More provisions, more regulations, more costs, and less money to lend.

I was looking forward to buying banks after Modi’s win however now this a sector to avoid.

7. Insurance firms

Not a lot of commentary around these listed firms. Only god know knows what kind of losses they are writing off on bonds and how this will affect the pricing in the future.
The Indian insurance sector is one of the best regulated and stable sectors in the world. God bless them to cross this hurdle.

8. Asset allocation

This tragedy again confirms the importance of asset allocation. PPF, Real Estate, Gold, Equities, Bonds. Mix them well. Don’t go overboard on a few of them.

Some of these asset class act as a natural hedge while some collapse together.

Finally, a bond default is terrible news. A bond default by a financial institution is catastrophic. FIs trust on each other and one defaults hits everyone. And I mean everyone. I hope this is the last name that faces the problem in NBFC space (although I have a feeling this won’t be the last).

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