'ABC Company offers 15 per cent on Fixed Deposits' screams a newspaper advertisement. But does the advertisement also mention the company's rating? Chances are it does not. Even if it does, the print will be so small that you will require a microscope to read it.
The last few decades have seen investor wealth getting eroded due to various scams and financial mismanagement. Be it Harshad Mehta scam, CRB scam, Ketan Parikh scam, Satyam scam, Saradha scam and so on. Investors have burnt their fingers badly.
The root cause of this is investor aspiration for high returns. However, at times, investors' aspiration to make 'high returns' is so intense that it overpowers their financial wisdom. Most of the schemes which promise high returns may have an unsound business model or the promoters may not have a concrete plan on how to implement their stated objective. Many a times, the intention of the promoters of these investment schemes is to cheat on the investors and make money for themselves.
There have also been cases where Mutual Fund and insurance companies, too, have mislead investors in order to boos their sales.
For instance, most of the New Fund Offers (NFO) of MFs were marketed like equity IPOs giving false hope of appreciation on listing of the offer or on allotment.
Similarly, insurance companies sold ULIP with high front end charges.
In case of equity IPOs and Follow On offers, the investors have lost out due to overpricing of the issue.
Currently some of the manufacturing companies are promising high returns on their public deposits.
Despite warnings from regulators like SEBI, IRDA and Department of Company Affairs and media reports of investors getting conned by these schemes, the 'guaranteed' high returns pitch continues to be a big draw.
Investors should be wary of any scheme which assures high and guaranteed returns because today it is almost impossible to get the same due to volatile business conditions.
Most of these so called high returns schemes follow a certain pattern. We list out some features that you should watch out for:
High 'guaranteed' returns: Returns are directly proportional to risk, that is, the higher the return, the higher is the risk. So, there cannot be any 'guaranteed' high return products. If any scheme promises you abnormally high returns consistently (returns guaranteed may vary from 15 per cent to 40 per cent every year), it could be a fraud in the making.
No clear documentation: Most schemes that promises high returns do not have proper and clear documentation. Whatever may be promised to the investor at the time of investment may not be reflected in the written document provided for after investment.
Higher initial investment: Usually, in such schemes, the initial investment demanded from investors is high. The reason is because the company is run totally out of the money invested by the public. The promoters do not contribute much in such ventures as they themselves know that the business model is faulty or the basic intention is to defraud the investors.
The promoters of such fraud schemes divert the money received from investors for personal gains. At times, a part of the money received from new members is distributed to the old members as return on investment. These frauds are uncovered when new investment tapers down and the money flow breaks.
Complicated investment strategy: In most cases, these schemes have a complex investment strategy. Neither will they follow disclosure norms. Besides, no information about these schemes will be available to investors.
Unsustainable business model: The company promising you 'incredibly' high returns must have a sound business model. It is important on the part of the investor to ascertain for himself that can the scheme mobilises the promised return.
Few years back, many plantation companies were propagating high returns. Investors have lost out in these schemes as plantation is subject to vagaries of nature.
"Safety net": Many a times, they will promise a safety net for the investors. However, more often than not the organisers will disappear in no time leaving the investor in the lurch.
Before investing in any scheme that sounds too good to be true, there are a few precautions investors should take:
Does it have regulatory approval: Being a limited company does not give an entity permission to mobilise public money. It needs approval from either Sebi or RBI to raise money from the public.
Is it transparent: Invest in avenues which are transparent and have lot of information in public domain (e.g. blue chip equities, mutual funds, Exchange traded funds and so on). These have high disclosure standards, too.
Are you getting regular account statements: A genuine investment scheme must provide account statements at regular intervals - monthly, quarterly, half-yearly or annually. If it isn't doing so, something may be wrong.
Is the return in line with what was promised: The performance of the scheme should be in line with the return promised. If not, ask questions, seek explanations, and if need be, take necessary recourse.
Is the instrument rated: It is advisable to invest in rated instruments where the rating is given by recognised rating agencies. It is also advisable to go for the highest rated instrument (AAA) even if the return is low, as it signifies certain degree of surety of capital and returns.
Although maximising on returns is the stated objective of any investor, it is essential to ensure safety of capital too. In our quest for higher returns , we should not put all our capital at risk.
It is not wise to blindly invest in schemes that promise high returns. Invest wisely with caution, only then will you be assured of returns.
Source: The author is a freelance writer
