Spot the tell-tale signs of investment scams and know how to avoid them

In June, Moneycontrol had advised readers to be careful about WhatsApp and Telegram scams where gullible individuals are lured into joining social media platforms

A Moneycontrol reader recently called in to say that a mid-sized stock brokerage house approached her to download an app on her mobile phone and start trading. And to get ‘proof’ of why the brokerage firm's trading ideas work wonders, she was also advised to join a WhatsApp group of other like-minded customers.

In June, Moneycontrol had advised readers to be careful about WhatsApp and Telegram scams where gullible individuals are lured into joining social media platforms via fake testimonials and enticed to part with their hard-earned money. What’s worse; scamsters clone popular stock brokerage apps to make them look authentic — on the lines of the one that was peddled to the Moneycontrol reader.

But there are some tell-tale signs that make a perfectly-sounding investment product, a red herring.

How to spot an investment scam

Promising high returns

If an investment product gives you a guaranteed return, say, 15 per cent, should you jump in and invest? The moot point is: how much promised return is realistic.

Ashish Chadha, a registered investment advisor based in Gurugram, advises investors to check the 10-year bond yield. If these yields are around, say 7 per cent, he says anything guaranteed above that is unrealistic. There’s another alternative. Deepesh Raghaw, a SEBI (Securities and Exchange Board of India)-registered investment adviser, suggests to check the State Bank of India  (SBI) fixed deposit rates. “Anything that guarantees you more than 7 per cent, then it's a big red flag,” says Raghaw.

Flavour of the month

Is your stock broker a random finance seller who has approached you to sell a ‘hot’ sector that promises to multiply your wealth? Check again.

The Rs 65-lakh crore Indian mutual funds (MF) industry has been launching a lot of thematic/sector funds. Data from Value Research shows the share of new thematic and sector fund launched — among the overall new fund offer pie — went up from 24 per cent in 2001 to 40 per cent in 2023.  So, of the new schemes launched last year, 40 per cent were sector/thematic funds. Similarly, this year, 59 per cent of new launches are sector/thematic funds.

At the recently-held Moneycontrol’s annual MF summit in Mumbai, some of the leading equity fund managers said that these funds offer new avenues for them to invest in. If you invest in such new sectors and themes through MFs, which SEBI regulates, there is no clear and present danger, assuming your portfolio need them.

The matter comes to a head when unregulated sellers jump on the bandwagon and want to make a fast buck. Chaddha points out that these days investors have a craze for defence sector stocks. For instance, HDFC Defence Fund, the first such scheme, was launched in May 2023. It collected Rs 997 crore, as per the data from Value Research. As of end-August, its corpus became Rs 3,952 crore. two more Defence sector funds have been launched since then. Chadha, who has served the Indian Army for 11 years, has sectoral domain expertise. He says, the glory days of the sector is behind it. “The valuations of companies in this sector are very high. This sector has past its prime around seven-eight years ago," he says. Chadha, in his personal capacity, made money when defence sector funds were a hot pick.

Avoid greed

Kshitija Ravi, Director, Gaining Ground Investment Services, goes by a simple, yet often forgotten, rule. “No one can mislead you unless you allow it. Your personal responsibility is critical as far as sound investment decisions are concerned,” she says.

That begs the big question: how much return can you reasonably expect to get? A ballpark return from fixed-income investments, many advisers say, is up to 8 per cent. For equities, the corresponding figure hovers around 12 per cent. There is a critical condition, especially for equities: stay invested for up to five years and the probability of making losses go down. That’s still not a guarantee, but it is the way to make money in equity markets. “One of the most common traps is allowing oneself to be guided by unverified stories. This can lead to significant financial losses. If you can’t understand the underlying investment, better avoid,” warns Kshitija.

Social media stars

Take a good hard look that individuals sell on social media. When cryptocurrencies were booming, some FinFluencers used to recommend investing in them. But when cryptocurrencies fell sharply globally, FinFluencers went quiet. But by then, investors who were invested in them, lost a lot of money.

Viral Bhatt, Founder of Money Mantra, a personal finance solution firm, urges investors to verify the legitimacy of investment platforms with regulatory authorities like the SEBI. “Do thorough research and consult a financial adviser — if anything looks tempting and interesting that you see peddled or talked about, on social media — before making any investment," says Bhatt.

Get rich-quick scams

Amol Joshi, Founder of PlanRupee Investment Services, says that many times investors fall into traps because they want to get rich overnight. Scamsters know this behaviour all too well to exploit. He cites the example of an initial public offering ‘(IPO) scam’.  Typically, scamsters promise preferential allocation to IPOs, especially in small- and mid- sized companies, by citing many instances of listing gains that have been seen in recent past. News in the media about bumper IPO listing only add to the mass hysteria.

Joshi highlights another raging scam to earn a quick buck.  Investors are encouraged to ‘like’ social media posts for a prize; the more they ‘like’, the bigger the prize. Joshi shares a text message of one such scam where Rs 50 is dangled as a starting prize to ‘like’ a post. Initially, the investor does get the money. Once the scamster gains an investor's confidence, h/she is lured to ‘like’ more such posts. Say, you like 100 posts in a single day. At the rate of Rs 50 per post, explains Joshi, you stand to earn Rs 5,000. The scamster would tell you to first deposit the Goods and Services Tax (GST)  at 18 per cent, which works out to Rs 900, in a bid to receive the prize money worth Rs 5,000. Once you deposit Rs 900, the scamster pulls off a disappearing act, much to your dismay.

“Unfortunately, senior citizens are most vulnerable to such scams. Many senior citizens have smart phones because they need them for their daily use. To make matters worse,  it is easy to gain trust of an elderly person,” adds Joshi.