How to avoid investment in Fraud schemes?

There are several suspicious schemes operating in the market. The promoters of such schemes float companies with attractive names. Investors need to be very careful while doing investment in Fraud schemes.

They start in a particular area and then, on attaining saturation of member enrollments, keep shifting over to new areas. While promoting the schemes, they get film stars, politicians, sportspersons, etc. at grand functions to impress the public.

But as a wise investor, we should avoid investment in Fraud schemes.

Such a fraud people engage persuasive direct marketing agents, print attractive brochures, release eye-catching advertisements and hoardings and offer gifts to the investors.

They also use attractive slogans and also “honor” their members with titles like Silver Member or Gold Member.

In this quick guide will see details about why and where not to invest our money.

Some of such investment in Fraud schemes that are designed to entrap the gullible public by luring them with the promise of becoming rich overnight are:

MONEY CIRCULATION SCHEMES (MCS)

MULTI-LEVEL MARKETING SCHEMES (MLM)

NETWORK MARKETING (NWM)

SELF EMPLOYMENT YOJANA (SEY)

By enrollment into such a scheme, one gets back some or full initial investment and then keeps gaining financially by enrolling new members. So also the second set of enrollers keeps multiplying and gain financially, luring every onlooker.

Such a system of chain to work endlessly to provide profit to everyone concerned ultimately breaks down at some stage, resulting in big financial losses to many.

When a person fails to get his required clients or enrollees, the promoters of the scheme do not tell about the non-viability of the scheme but blame it as one’s personal failure.

Many companies have now disguised into the activity of marketing goods, services, drugs and health care products.

So I would suggest avoiding investment in this option.

CHIT FUNDS

Chit fund is a kind of savings scheme under which a person enters into an agreement with a specified number of persons that every one of them shall subscribe a certain sum of money by way of periodical installments over a definite period and that each such subscriber shall, in his turn, as determined by lot or by auction or by tender, be entitled to the prize amount.

However, there are many such schemes which have been misused by their promoters and there are many instances of the founders running what is basically a Ponzi scheme and absconding with their money. So let’s stay away from investment in Fraud schemes.

DEPOSITS

Finance Companies take deposits from the public, promising them unusually high returns.

Since high returns are unsustainable, ongoing repayments of interest and deposit amounts depend on a continuous and uninterrupted flow of fresh deposits.

At some stage, when the flow of deposits gets stifled, the payments to the investors stop, leaving them high-and-dry.

PRIVATE PLACEMENTS

Many companies offer equity shares/convertible debentures/preference shares etc to the public through the private placement route, often for an “a mega project’ and promise dream returns.

By law, such securities cannot be sold to more than 49 persons, beyond which the Company is required to come out with a Public Issue under the guidelines of SEBI.

Tip

Remember that there is no free lunch and that there is some catch when someone offers to make money for you easily and quickly.

So any get rich quick scheme or high returns schemes should be suspected. Remember also that these schemes are unsecured, are illegal and are not regulated by the Government so it’s better not to investment in Fraud schemes

As such, if you lose money, you will not be able to seek any help from the Government.

If you are a newbie to the stock market then check out our guide for getting started with the stock market.