Can big financial companies be trusted?
‘Subra you did a post on do not trust an employee…can we trust a big branded financial company?’ asked a reader.
Of course you can trust a big financial company as long as you can remember that:
MF Global misplaced US $ 633 Million (or was it Billion or Trillion – when it comes to US, these words lose their meaning)
Bernie Madoff ran a big company
Goldman Sachs is a big company which sold ‘garbage’ to clients and bet against the same bonds which made up YOUR portfolio
HSBC Bank is being prosecuted in UK
Arthur Anderson was one of the big 5…till it became big 4.
I am sure when the Gold bubble bursts one of the subsidiaries of a big company will confess that they did not check…and about 125kgs of bars are actually not gold…but an alloy with about 22% gold. L O L. They will say “our trustees depended on certificates issued by….”
Just Google about Citibank, HSBC, …and their run in with regulators around the world…read about Japan for starters 🙂
so these are the caveats…:-) L O L….
by the way do you want Indian examples? I am afraid some of them are still in business…:-)
and also read this please
Raja
Subra Sir,
Is it possible that one day we will wake up to hear that some MF scheme doesn’t hold the securities that they claim to hold and the NAV has to be adjusted to reflect this new reality ? Just wondering !! being a investor in MF’s. When one of the big four can certify to non-existent cash in bank’s for a company like Satyam, then how far fetched is this possibility ? After we also have the sahara’s in MF business.
Abhisek
Raja- I second your concern. Everything is possible- so make sure you diversify.
Raja
Hi Abhishek,
I agree and am reasonably diversified with 4 diff schemes, each from a different fund house. But i was trying to understand if the internal audit process of these MF houses is strong enough to protect investors like me from such issues.
Regards
Raja
Piyush
@ Raja
Interesting concern I must admit, and made me think twice before replying. However, I would have to say tht the probability of this happening is as good as zero. Moreover, there is no incentive for doing the same for the mutual funds. They earn on the basis of a set expense on AUM( approx. 1% for debt funds and 2% for equity) and hence whether tht money is held in cash or in stocks makes no direct difference to the mutual fund’s earnings. Of course depending on the performnce,value of AUM may go up or down. If it goes up, MFs will earn on higher AUM. And if it knows that value will go down, it will sell equity and hold more cash, thus protecting their AUM and earnings. So there is no incentive to fake security holdings.
Raja
Hey Piyush,
Thanks for the detailed explanation. I assume these things will be industry standard practices and my worry is not on how it’s calculated.
My question in simple words was what if X MF scheme claims to hold say 4y of some equity Z. But in reality only hold y (1/4th of claimed quantity) quantity of it. And this has escaped the notice of auditor’s or who ever is the audit authority on these things.
Regards
Raja
Piyush
Such siphoning of money seems highly improbable to me. MFs are highly regulated entities with daily NAVs which investors can use to redeem anytime. Hence my sense is that you can rest assured on tht siphoning of money front. The real concern should be to select the right fund to suit your need.
Ashok
Hello,
Satyam was “audited” every quarter year after year till Raju confessed.
So don’t go by audits and stuff. Diversify or die should be the mantra.
I have investments in 6 fund houses and I try to keep exposure to less than 20% per fund house. Also I trust, perhaps irrationally, the American fund houses (Franklin Templeton, for example) than the Reliance MF or Sahara MF.