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The Two Minute Mess: Unanticipated Risks to Your Investments
Posted On Monday, Jun 22, 2015
The whatsapp message read that after Nestle’s “Maggi” was banned 90% of the women on matrimonial websites removed cooking as a skill they possessed! ☺
This statement made me laugh and also made me realise the popularity of Maggi. For those of us born in early 60’s or earlier, food was largely the fresh variety. Those born in later years were exposed to processed food, and Maggi played a large role in their lives. The ban on sale of Maggi is a serious issue for Nestle. The risk committee at Nestle may have discussed various risks including regulatory risks such as the one they are facing now. Looking at the initial reaction of the company to this problem, in my view it appears that the company gave a low probability to such regulatory risks, and when it happened, were caught totally off guard.
Risks cannot always be completely eliminated, they just get reorganised. Some gain in strength while others fade away. It is like energy levels, it subsides in one place and resurfaces strongly elsewhere.
Nestle got into trouble when the food safety authorities in Uttar Pradesh state tested the contents of Maggi and found the level of lead content to be beyond the permissible limits. The testing and the subsequent judgement has raised many questions and has added new risks for the food industry.
Some obvious questions are...
| 1. | What are the food standards in India? On what basis did Nestle sell its Maggi product for all these years? What are the standards for the “good for health” products such as honey, chayawanprash? |
| 2. | What are the standards for packaged and street food? |
| 3. | What will be the impact on health of all those who consumed this product? Is there a contingent liability that the companies may be forced to create? |
| 4. | What regulations could be in force in future?and the cost of complying with those standards? |
More specifically
What could be the impact on Nestle? When will they be allowed to re-launch Maggi? Do they have alternative plans to recover the loss?
Similar to the unanticipated risk that Nestle faced, investors may also face unanticipated risks to their investments.
Lessons for investors
| 1. | Risks change colour, if one risk is addressed, something else may come up. The composition of risk may change and you can move risk from here to there, but is never completely eliminated. |
| 2. | Be alert, and regularly review your financial needs and resources available to meet those needs. |
| 3. | If the financial plans have been created based on a set of assumptions, then try tweaking those assumptions and test your plan with the new set of assumptions. |
| 4. | Have some clarity on what needs to be changed in your financial plans if the new set of assumptions turns out to be true. |
Some of the unanticipated risks for investors could be:
| 1. | The earning member of the family passes away. Death is certain but most of the investors would assume a long life while making financial and saving plans. What happens if death occurs earlier? |
| 2. | The land which you purchased near the ocean gets marked as no construction zone by the local planner. The purchase price of the land is large and is of reduced value now. How to salvage the situation? |
| 3. | Your son or daughter gets admission in to a well-known college abroad and you had not planned for this. You do not want to disappoint the child. An urgent need for cash has arisen. What to do? Can some assets be quickly liquidated? |
| 4. | You take a housing loan, and the small and boutique consulting firm that you worked for closes down, because the lift in which the CEO and the deputy CEO were going together to their office floors, crashed and grievously hurt and incapacitated them. |
Many risks can be anticipated and an investor can save and invest prudently to address these risks.
Some of the ways in reducing or addressing risks to have a backup or a contingency plan in case things go wrong are:
| 1. | Diversification across asset classes and within an asset class. For example the investor could diversify his investment across equities, debt, gold and property. In properties, the diversification can be done by investing in different locations and in different types of properties such as commercial, or residential. |
| 2. | Taking adequate insurance maybe an answer to some of situational risks stated in the above para. |
| 3. | Urgent need of cash could be addressed by having some proportion of investments in assets that can be liquidated quickly. |
But some time the unanticipated risks occur. Despite the well laid out plans to overcome some of the risks that may turn up at your door, there could be situations that an investor never thought as a possibility. Courage, moral strength, smart thinking would be needed to face and come up with solutions to handle such situations.
Disclaimer, Statutory Details & Risk Factors:
The views expressed here in this article / video are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. Quantum AMC / Quantum Mutual Fund is not guaranteeing / offering / communicating any indicative yield on investments made in the scheme(s). The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of this article should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments. Please visit – www.quantumamc.com/disclaimer to read scheme specific risk factors.
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