Beware! How To Spot Fraudulent Investment Schemes
Jul 22, 2019

Author: Divya Grover

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Thousands of investors in Bengaluru fear losing their years of saving after having found out that the company they had trusted with their hard earned money had duped them. The case in point is the multi-crore IMA Jewels Ponzi scam which unfolded recently.

Here is how the investors were tricked into the scheme:

The company claimed to have been in the business for 13 years. People invested in the scheme because they were promised high returns. Most of them were encouraged to invest in the scheme by the people they knew, who cited their own example of receiving regular payments from the company.

Investors were required to invest in the multiples of Rs 50,000 which could be withdrawn any time after a 45-day notice. They were promised returns of 1-3% every month, which were dividends from trading in bullion and jewels.

Initially the investors received returns on time, but later the payouts dwindled and finally ceased from March 2019. When the anxious investors thronged the company's office, they found that the founder has fled the nation. Apparently, there were rumours that the founder is considering suicide. However, the founder was arrested on July 19, 2019 and the investigation is on.

History tends to repeat itself and this fraudulent case joins the bandwagon. Some of the most infamous were Saradha chit fund scam, SpeakAsia scam, among many others. Despite strict regulation such schemes are rampant because investors give in to their greed for higher returns.

[Read: 8 Steps To Avoid Being Tele-Conned!]

The people investing in such schemes mainly belong to economically weaker sections of the society. They lack understanding of the banking and financial system and depend on the advice of friends and relatives for their investment. However, their friends/relatives may themselves be victim of such schemes.

Fundamentally, such schemes utilize the money from new investors to payout old investors. When the fraud comes to light, many investors are afraid to take legal help or face challenges seeking proper means of recourse to get their money back which makes them an easy target.

Investors should be careful before they part with their money and watch out for these warning signs:

Above normal returns/Quick profits

6 Warning Signs to Spot the Fraudulent Investment Schemes

If the scheme is offering returns/profits that seem too good to be true, it probably is. Many a times to lure investors, scamsters offer very high returns such as more than 15% in a short span. Some may even offer to double your money. Initially, such schemes give regular payout to investors so that they get more investors, but eventually such payments reduce till it finally stops.

[Read: "Double your money within a year": Do you get carried away with such claims?]

Guaranteed returns

Though some schemes have the potential to generate higher returns, it is not guaranteed. Thus, if a scheme is guaranteeing regular high returns, it should be considered a red flag.

[Read: Are You Falling Prey To SMSs That Lure You With Guaranteed Pension?]

No mention of risk

Every investment carries a certain level of risk (even the investments that are generally considered safe) though the magnitude of risk may vary. Every regulated scheme is required to disclose the risk involved in investing in that particular scheme. If the scheme does not show transparency in disclosing the risks involved, it is a sign of fraud.


Check if the scheme is registered with SEBI, RBI, IRDAI, PFRDA, MCA, NHB, or any other regulatory body. If it isn't, it is not safe to invest. If the scheme is unregulated, you will find it difficult to take legal recourse in case of any fraud, malpractice, and grievance. Make sure that you are able to track the performance of scheme on public platforms (other than company's website) whenever required.

Complicated terms/business model

If the terms of the scheme are too complicated or if you don't understand the business model, it is better to avoid investing in them. Even ace investor Warren Buffet only invests in businesses that makes sense to him and if he fully understands the model, market, and the customer base.

Urgency/pressure to buy

If the sales person is showing urgency in selling you the scheme or pressurising you to make quick decision without explaining or allowing you to go through the policy terms, it is likely that it will not be in your best interest. The sales person may use this tactic so that you do not have the time to understand the terms and conditions of a scheme. They risk losing a potential investor if you clearly understood all the terms and disagreed with any.

To sum up ...

Investors must be mindful before making any investment decision and must avoid doing so in haste. Go through the policy terms carefully to clear any misunderstanding. Do not let the greed of higher returns lead to wrong decisions; remember that higher the returns promised, higher is the risk involved. If promised quick profits or high returns do not fall for it.

Avoid investing in a scheme just because it is popular or because your friend/relative has recommended it. Also do not invest all your savings in a single product. Conduct your own basic research of the scheme before investing.

Invest only if the risk profile of the scheme matches with your own. Mutual funds offer scheme for people with different risk appetite. They are also duly regulated by SEBI. You should select the scheme after assessing your financial objectives and time horizon. Finally, evaluate the consistency of scheme's performance across different time period and market cycle. If you feel confused about which scheme to invest in, consult your financial advisor.

[Read: Key Points To Be A Responsible Investor In Mutual Funds]

If you are a victim of any investment fraud, report it immediately to the concerned authority. RBI has launched a website called Sachet to curb illegal collection of deposits by unscrupulous entities. Investors can share any relevant information on the website, which will help regulators in addressing the issue.

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