Trap 10. ‘These Bonds Are Like FDs But Offer A Higher Rate’

It’s common for bank relationship managers to start pitching investment products whenever you call them for any update or help. It is part of their job as they have targets to achieve. Usually, relationship managers sell insurance and other bank products, and sometimes the sales pitch becomes so aggressive that you may end up with some investments that may not be entirely suitable for you.

Many individuals, allured by the promise of higher returns, often fall prey to such pitches, especially if it’s wrapped with the attractive cover of a fixed deposit (FD), which gives guaranteed returns. In such a case, both the relationship manager mis-selling a product and the investor’s greed are at fault.

Mis-selling of Yes Bank’s Additional Tier 1 (AT1) bonds was a classic example of such a case. They  were sold to investors as FDs with a five-year lock-in with higher returns than a normal FD. In reality, AT1 bonds are perpetual bonds, where investors do not get their principal back unless the bank gives an option to buy it back after five or 10 years. However, the interest payment continues forever.

Investors got a rude shock on March 6, 2020, when Yes Bank was placed under administration by RBI, and AT1 bonds became worthless for the bondholders. AT1 bonds are contingent convertible bonds that a bank can convert into equity if its capital levels fall below specified thresholds. Equity holders are paid only after all other claims on the company’s assets have been paid. They come last in the hierarchy.

Investors fell prey because they did not do their due diligence before investing in them and trusted their relationship managers blindly.
If your relationship manager promises an FD that gives higher returns, then treat it as a red flag. Bonds and FDs are different products and are meant for investors with different risk profiles.