While there is a lot more visibility these days around financial scams and ponzi schemes, investors seem to falling prey to these “fantastic” schemes quite consistently nevertheless. Even our other risk averse senior citizens tend to get carried away when out of this world returns are promised. As the author says, besides being less greedy for returns there are certain other signs that investors should watch out for to avoid falling into such ponzi scheme traps . Team RetyrSmart
Don’t be Greedy. The best way to stay safe from Ponzi schemes
The five red flags that should put you on alert while evaluating an investment proposal.
- Out-of-the-ordinary returns
Any scheme that promises returns higher than 15% should trigger scepticism. Ponzi schemes promise consistently high returns or payouts, and keep their word initially to trap the first set of victims, who are then persuaded to enroll friends and relatives, to keep the fund flow ticking. Once it dries up, the payouts stop due to lack of any intrinsic value in the business. It essentially entails fleecing Peter to pay the duped Paul till the cover is blown, and the cycle grinds to a halt.
- The guarantee aspect
While equity as an asset class can generate 12-15% returns over the long-term, stocks and equity funds have their ups and downs in line with market cycles and volatility. Ponzi schemes are easily identifiable because of the ‘guarantee’ element they offer. Pointing to attractive historical returns to showcase strong performance is understandable, but to assure the returns in future is not possible. Beware of such attempts to sound honest and hence, reliable.
- No info on downsides
You will be told that not only are the returns high and guaranteed, there are no downsides either. The moment you are told the business is successful because of some ‘secret’ fail-proof recipe, give such schemes a wide berth.
4. Unregulated scheme/adviser
The companies, intermediaries and the schemes are not well-regulated. To eliminate the scope of being tricked, ask the agent if he is registered as an adviser with any of the financial regulators. Enquire whether the agent and the investment scheme being peddled is registered under the RBI, Sebi, Irdai or PFRDA.
5. Anecdotal evidence
Lack of transparency means the ‘returns’ are not publicly available, so you cannot independently verify the claims. Therefore, the only ‘evidence’ such schemes tend to provide is testimonies of their existing victims – who, more often than not, happen to be your friends and acquaintances. Be wary of any scheme whose returns cannot be accessed on public platforms. Do note that the companies’ websites or those of their group companies will not qualify for the purpose. The information should be available through easily accessible, independent platforms.
Finally, however, knowing all these warning signs can come to naught if you cannot control your urge to make a quick buck. So the moral of the story is ‘don’t be greedy’ when it comes to investment returns