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5 things to watch out for
In the aftermath of the biggest financial scandal, Sharadha Chit Funds, to hit India in recent times, investors in West Bengal have been taken for a joy ride. And before you say, “Oh, can that happen to the intellectual Bongs? They were fooled 30 years ago by Sanchayita Investments; they have been f
IN THE AFTERMATH of the biggest financial scandal, Sharadha Chit Funds, to hit India in recent times, investors in West Bengal have been taken for a joy ride. And before you say, “Oh, can that happen to the intellectual Bongs? They were fooled 30 years ago by Sanchayita Investments; they have been fooled again,” beware. You too could fall prey to such schemes unless you are careful.

We present 5 investment redflags.

Too good to be true

IF THE promised returns are too good to be true, then in all probabilty they are so; namely, too good to be true. It doesn’t matter what the pedigree of the company is. It doesn’t matter how intensive the advertisement campaign is or who the model is. So, if you are promised say a return of 20 per cent on an investment, remember that the company itself would have to earn close to 30 per cent pre-tax. Now, it would like to retain some return for itself, say at a minimum 20 per cent. Hence it would have to earn close to 50 per cent per annum on its investments. Now, there aren’t very many legal business opportunities that help you earn that kind of money. Also, remember the first axiom of investment. That, higher a monkey climbs a tree, the more it exposes its back. Meaning higher the return you look for, higher is the risk that you will have to take. The moral: if the returns offered are very high, stay off; unless you are okay with losing it all.

High sales pitch a strict no-no

IT DOESN’T matter how compelling the agent’s arguments are. When there is excessive sales pressure from the agent, hang up or walk away. When you are asked to invest on the spot, that’s a red flag. If the guy is trying to make you feel guilty, stupid, or is intimidating you into making a decision, leave immediately. Never tolerate sales pressure when investing. Intimidation, inadequate disclosures, non-traditional payment choices, encouraging you to invest based on trust are all examples of manipulative investment sales practices. Never rush a decision or invest based on emotion. Due diligence will slow the sales process sufficiently to offset manipulative practices. Investments must be understood fully before accepting risk. Legitimate investments that are good today are still good tomorrow.

Forget products that you do not understand

MAKE Rs 6 lakh in six years is what the agent promised you. You could also claim deduction on your investments from income tax is what he said. It was  an insurance plan, which for you was the need of the hour. And so you bought the ULIP. Ofcourse, you forgot or were perhaps not told that there would be an annual premium of Rs 30,000. What you man forgot was that ULIP is a combination of plain life cover with a component of investment thrown into it.

Out of your total premium, some part is set aside for the insurance cover and the rest is invested. You can choose to invest in an equity fund or a debt fund. Depending on your risk appetite, you can take a call. The money collected by the insurance provider is utilised to form a pool of fund that is used to invest in various market instruments  in varying proportions. There is a complexity in product and is also difficult to understand. As an investor it is not easy for you to understand and you are not convinced whether to invest or not, it is better not to invest. Discretion is the better part of valour. In the instant case your corpus can shrink due to the high charges, plus the volatile nature of the equity markets into which the investments are made. If you haven’t understood that you had no business, in the first place, to make the investments.


Secret offers

WHEN YOU open your personal mail id, you see a mail from CHEVROLET MOTORS WORLDWIDE LTD stating you have won 500,000 GSP and a brand new Chevrolet car in a promotional event-email lottery scheme. The organisation has provided their contact details and wants you to contact them at the earliest. It does not want you to share this information with someone as they believe somebody can manipulate and make false claims and it is totally against security policy of their organisation. You are convinced.  Because, you are familiar with the brand name and company (Chevrolet Motors Worldwide Ltd). Because the amount is from International Organisation (offshore). Because they have Policies and Procedures (Security Policy) and there may be confidentiality in the dealing. That’s the redflag.  

One has to be cautious, when one receives such a mail stating there is an offer and it is a secret and restricts you from sharing it with others. This is a classic example of a fraudster who does not want to  share this information with others who may guide you by identifying a “possible booby trap.”

In the 18th century, in England, brokers recommended and investors invested in a new company with no sales or earning - just great prospects in what came to be known as the South Sea Bubble!


No auditors

BERNARD MADOFF is an American white collar criminal. He was the operator of a Ponzi scheme that is considered to be the largest financial fraud in  the U.S. history. Madoff founded the Wall Street firm Bernard L. Madoff Investment Securities LLC in 1960, and was its chairman until his arrest on 11 December, 2008. The firm was one of the top market maker businesses on Wall Street, which bypassed ‘specialist’ firms by directly executing orders over the counter from retail brokers.

On 10 December, 2008, Madoff’s sons told authorities that their father had confessed to them that the asset management unit of his firm was a massive Ponzi scheme, and quoted him as describing it as ‘one big lie.’ The following day, FBI agents arrested Madoff and charged him with one count of securities fraud.  In March 2009, Madoff pleaded guilty to 11 federal felonies and admitted to turning his wealth management business into a massive Ponzi scheme that defrauded thousands of investors of billions of dollars. On 29 June, 2009, he was sentenced to 150 years in prison, the maximum allowed.

Madoff was audited by Friehling & Horowitz, a two-person accounting firm that had only one active accountant, David Friehling. Friehling was a close family friend and an investor in Madoff’s fund, which is a blatant conflict of interest. Friehling was not registered with the Public Company Accounting Oversight Board, which was created under the Sarbanes-Oxley Act of 2002 to help detect fraud. Nor was the firm ‘peer reviewed,’ in which auditors check one another for quality control. According to the AICPA, Friehling was enrolled in their peer-review programme, but was not required to participate because he supposedly didn’t conduct audits. It later emerged that Madoff’s banker, JPMorgan Chase, had known that Friehling wasn’t registered with the PCAOB or subject to peer review as early as 2006.

In the end, what matters is whether you can conquer greed and allow your money to stay safe and secure.

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