The risks of pitching your money in unregulated assets

Of late, investors, especially the younger ones, have got on to the bandwagon of making quick returns. For them investments like gold or equities are for the older generation. This isn’t to say they do not invest in those assets. However, their focus is on newer, more exotic investments which give higher returns, such as cryptocurrencies, managed farmlands, gold savings schemes from jewellers, invoice discounting etc. 

Unfortunately,  most such investments are not regulated. What this means is that there is no governing body to keep things in check. There are no standardised reporting rules or protection. Basically, there is no grievance redressal if something goes wrong. 

Take the case of a well-known cryptocurrency platform which faced a cyberattack last year. As the platform had not insured the customers’ wallets, there was no way to fund the wallets and customers couldn’t access their funds. A class action suit was filed by many investors with total investments above Rs 2000 crore, which has been rejected by the Supreme Court. The petitioners have been advised to approach the union government and financial regulators. 

Due to the lack of regulation and legal status, the aggrieved investors have no clear legal route to recover their money. Digital assets carry the potential risk of hacking and more critically, the lack of legal recourse since there’s no governing authority to help recover stolen assets.  

With unregulated assets, investors might not fully understand what they are investing in—even if they think they do. How many investors actually understand the working of blockchain? Many unregulated investments are structured cleverly to avoid regulation. For example, the gold savings schemes by jewellery shops allow investors to invest into gold every month. Even though this sounds like a deposit, these deposits are accounted as advance purchase of gold. Due to this, the product is not regulated by the Reserve Bank of India (RBI). Every year, a few cases of default come to light and investors have no way of getting back their hard earned money. 

Sadly, many small investors lose their entire life savings to these schemes. Hence, whatever the promised returns, the first check in any investment should be about the regulator, be it RBI, the Securities and Exchange Board of India, Insurance Regulatory and Development Authority of India or Pension Fund Regulatory and Development Authority.  

Generally, most unregulated products guarantee very high returns, almost double that of a fixed deposit. However, the risk in these products is probably 100 times!  Investors must understand how returns are being generated and what can go wrong.  Recently, an invoice discounting platform duped investors by showing fake invoices and siphoned off investor money to other accounts.  With constant regulatory oversight, such large scale money laundering is difficult. 

Regulation brings with it transparency and standardisation of reporting information, especially returns, which makes evaluation of the product easier. This is why one is able to compare mutual funds returns properly unlike in the case of stock baskets,  wherein each stock basket shows returns differently. 

Take a vow to invest only in regulated investments — because transparency, governance can provide peace of mind, which is the best return on investment!