How to protect yourself from investment scams

It looks like routine that at least once a month you read some news about investors being cheated. The amount runs into crores of Rupees and the number of investors into thousands. It is difficult to understand how people continue to get cheated time and again.

Let us look at the recent news item. This was a multi-level marketing scheme, where the instead of household items to be purchased, the investors were buying gold from a jeweler. The person was also promised a regular income if one is able to get new members. The return on investment was mouth-watering.

However, like all other Ponzi schemes, this one also relied on the greed of the investors and unfortunately, the investors obliged. Like any other scheme, this one also paid the investors some money for a few months and then stopped. It is only then that the investors realized that they were taken for a ride.
Considering the recurrence of such events, it is important that we look at the ways to stay away from such schemes. Are there any common characteristics? Are there any shields available? Well, some of the common traits are:

• Promise of huge returns – in fact, the returns promised are often unbelievable
• Positioning of the scheme as exclusive or only for a few people
• Showing urgency that the opportunity may not last long
• The scheme may be operating outside the regulatory environment

Out of the above, it is the first where you should start to be cautious. Let us be clear that we are asking you to be cautious, which means to check all the details. You do not have to outright reject any scheme that shows above characteristics.

The next step is to see if there are some shields available. Well, the most powerful shield one has is the right to ask. You are allowed to ask any number of questions and get satisfactory answers before you sign your cheque. Ask questions to understand how such an operation can be sustained. When someone is promising very high returns, the same may be possible for a short time or if someone has some technological breakthrough. It is impossible to generate very high returns from a common investment avenue like Gold for a sustained period of time. If someone is talking about investment in stock markets or real estate to generate higher returns, rest assured each one comes with some risk – equity has risk of volatile prices, real estate has risk of locking away your money.

Next time if someone tells you that the opportunity may go away, think about the choices you have: “What is better? To lose an opportunity or to lose your capital? Lost opportunity may come back ...”

Be careful. After all, it is your hard-earned money. An informed investor is always a better investor.