I think it’s a season for me to write about current affairs. India seems to be a hotbed for a lot of crises. Environmental, social but also a ton of economic crises. What with rising NPAs (Non-performing Assets) in the banking sector. But multiple incidents where retail investors have lost their life’s savings. Think about it. What would you feel if all that you’ve saved up went up in smoke? It would sure feel like shit. The Shraddha Chit fund scam, the KBC cryptocurrency scam and the latest one is the IMA Jewels scam. So what exactly has been going on and why are people losing money in scams in India.
Greed all around
We all want to make money. All of us want to do it as soon and with as little effort as possible. And that’s fine that’s human nature. Everyone wants to maximize returns. That’s the whole point of this blog, isn’t it?. Well, the problem starts when you let your greed get the better of you. So how does this play out?
So how do scams start in India?. Let’s see. We are social creatures, so you’ll sometimes notice that a neighbour or acquaintance suddenly seems to be flush with money. Buying fancy cars, new clothes all of it out of the blue. If you didn’t know any better you’d think he’s struck oil. Anyways here’s this acquaintance of yours who’s suddenly hit wealth, so you do the obvious thing. Aap ki tandarusti ka raaz kya hai?
Now your neighbour tells you about this fantastic scheme that he’s found that doubles your money every 3 months or gives you 20% interest every month. It’s a scheme that invests in Gold, diamonds, titanium adamantium. I’m not sure what he’ll tell you. All you must do is give him the money and he’ll sign you in.
You decide to test him and so tell him you’ll start off with a limited sum. The first month goes by and you receive your Returns. Second month again you receive your “returns”. Now your confidence Is rising so you invest a larger chunk. The money keeps coming in at the end of each month. All of a sudden your all flush with money, buying new clothes and cars and telling others about this great scheme. This goes on for a few months or in some cases years. All your family has invested in the scheme. And suddenly you stop receiving your “returns”. The “company” claims it’s a cash flow issue that will be resolved within a month. You trust them, after all, they’ve given you handsome returns in the past. But at the end of the month, the “company” is nowhere to be found. What the hell just happened?
Basically, the scheme runs on everyone bringing in new members/money. There are no real returns delivered. The scheme starts with the first individual convincing the second to invest in the scheme. At the end of the first month, he returns 20% of the funds you’ve invested back to you. You get convinced and bring in more people a level below you. He takes the money from those people and pays out the “returns” to the people at your level. They bring in more people. The money from the new people is paid out to the old people and so on. The only one making money is the operator of the scheme. All the people above the lowest levels are getting funded by the money from the lowest level. So its possible you make money out of a pyramid scheme. But it will always be at the expense of the ones at the bottom.
So What do you do?
1 . Stop chasing sure shot high return scheme
Don’t get fooled by promises of sky high returns. There’s a direct relationship between risk and returns. Higher the returns higher the risk. There’s no free lunch in the world. If someone tells you there’s a high return opportunity with 0 risk. Run away from them.
2. Educate yourself about financial matters
They say ignorance is bliss. Well when it comes to money it isn’t. All it makes you is a sitting target for one of these fly by night operators.
3. Ask for advise
If your unsure about a financial product or scheme being offered to you don’t fret. Talk to someone you trust. Someone who’s good with their own money. Someone who’s ethics you trust. A good financial advisor is worth their weight in Gold. If just as way of preventing you from making terrible losses and falling for scams.
Temptation abounds in life even more so in the financial world. Don’t blindly believe in experts and gurus. Do your own research. Run your own numbers. Sometimes even the so-called experts can be wrong. But more importantly, I love to quote 2 rules of the sage of Omaha here
“Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1”
– Warren Buffet