There can always be some hedging that can be done using derivatives but it cannot be used to guarantee something
THERE have been several cases recently where investors, both small investors as well as high net worth people, have run into problems with their investments. Tackling such situations requires special efforts on the part of the investor to ensure that they are not taken for a ride. There are several pointers that will give advance indications to the investor to be alert and hence these need to be considered.
Here is a look at the situations when the investor should be alert about the various happenings.
Higher returns: One of the first things that should alert an investor about a particular investment is when there are higher returns that are promised to them. Their relationship manager with a bank might do this or it could be an intermediary who is selling some financial product. The term higher returns is a relative term and for example debt investments where there is a promised guaranteed return of 18 per cent should immediately arouse the suspicion of the investor. A similar situation would arise with respect to other forms of investment and the main point here is that the investor should question how they would get these higher returns when it is not possible to earn them under the current conditions prevalent in the market. Safety in equity: If there is someone who is promising them safety when it comes to the investments in equity then this is something that has to be watched carefully. This is like assuring something that cannot be delivered because equity by nature is subject to large amounts of risk.
There can always be some hedging that can be done using derivatives but it cannot be used to guarantee something so this is an area to watch out for. There are different things that might be promised but adequate care in analysing the situation will give rise to the position that will enable the investor to question this position before committing any funds to the area.
Legally possible: There is another angle that the investor will have to watch out for whenever anyone is making promises to them. This is the legal aspect because the first thing is that whatever is being proposed should actually be legally possible.
This is where a lot of false promises are made because there are some things that are not possible for the other party to do or what the investor is not supposed to undertake. If this is not possible and there is some action undertaken then there could be some trouble in the future as the investor would not be able to enforce the details.
In writing: Often there is a simple solution to safeguard the investors against the various promises that are being made and this is also quite easy to implement. The best part of this is that it can be used with anybody who is making the promises.
This involves taking what has been promised to them in writing, which will make the entire situation easier to enforce in the future. This solves a lot of problems that might arise at a future date also because since the details are in writing it becomes very difficult for the other party to get out from the situation.
In reality getting this done is not an easy task because the moment the investor talks about having something put down in writing them there will be a lot of wariness from the other side. It is also quite common that the investor will be told that they cannot be given this in writing.
The moment this happens the investor has to understand that something is not right and that the situation requires further action in terms of study or a closer look at the actual conditions.
