Collective investment schemes and why we should avoid them

Collective investment schemes and why we should avoid them

Collective investment schemes and why we should avoid them
Recent media reports have again highlighted the surfacing of scams in the form of Ponzi schemes. These Ponzi schemes or Collective Investment Schemes (CIS) come in many forms and presentations but they all essentially mean the same.

CIS as they are popularly known as are formulated to play on the investors’ psyche of maximising their returns. We forget that higher returns mean higher risks. And promise of abnormal returns would invariably lead to loss of savings.

Most of these collective investment schemes are unregulated and promise unusually high returns. Initially they keep their commitments to buy the investors’ trust. Once the confidence is gained more and more investments keep coming. At an opportune time, the promoter of the scheme simply vanishes with our money deposited with them.

Why does it happen?

We are driven by a desire to gain as much as possible without for a moment thinking about the improbability of returns. How can schemes give returns on investments which are not linked to the market economy?

Such questions do not cross our mind. We are blind as greed takes the better of us. This is the precise reason why Ponzi schemes are periodically surfacing. We realise when the fraudster quietly slips away with our life savings.

How do the collective investment schemes work?

Multi level marketing MLM, pyramid schemes, lottery bonanzas, unregulated chit funds are all instances of Ponzi schemes which are floated to rob the common investor.  These schemes promise easy and quick money.

Their basic purpose is to enrol maximum members from whom subscriptions/deposits are taken. Once the process of enrolling members breaks, the scheme collapses.

The schemes work on the concept of networking giving prospective members a false sense of security. The chain building or the maze that is created through friends and acquaintances largely obviates the need for a close scrutiny by the prospects. Gullibility and greed for more money make people ignore the basic requisite of checking the facts. 

Remember ‘there are no free lunches’

Majority of investors are constantly looking for opportunities to get the maximum returns from their limited savings. Therefore, any scheme which promises better returns than the usual market instruments are quickly seized. Our reflexive brain makes the decision without for a moment realising that ‘there are no free lunches’ possible.

Before you succumb to temptations of easy money, please ensure that you are investing with a registered entity which is duly regulated by one of the financial regulators in the country.

The Reserve Bank of India, Sebi, IRDA, PFRDA are the regulators who are tasked with the responsibility of maintaining financial stability and securing the interests of the investors in the country.

 They ensure that entities approaching the market are authorised to accept funds in the form of money or otherwise. If unincorporated entities are found to have raised public deposits they face criminal action.

It is not our intention to mention the large number of high profile cases that have recently surfaced but in all of them the ultimate and biggest loser is the common investor.

Many thousands have lost their entire savings simply because of lack of application and the herd mentality in us. Criminal action will happen in due course but till then the worst will take place with the hapless investors.

Why do collective investment schemes keep coming?

It is a legitimate question but the answer lies with us. Why do we keep falling for these dubious schemes? It is our greed and lack of financial knowledge.

We give in very easily to what we hear without bothering to verify. We compromise on basic safeguards because the temptation of easy and quick money is too strong. If we ask ourselves honestly, the answer would most certainly be ‘greed’.

Do not chase money as it does not come easily except in unusual circumstances. Remember to treasure your savings and look for investments after a thorough check of the scheme and its background.

Trust in realistic returns and yourself as there would be no one who would protect your money.

It is best to stay away in case of insufficient knowledge and information. Financial regulators can at best guide you and make you aware. The regulators do not decide for you.

(The writer is a banking consultant)