Summary:
- Greed and fear are the two sides of investment journey and both of these get us in trouble. Greed of high return and fear of missing out on a good investment opportunity compels us to make bad financial decisions.
- The first rule of investment is to avoid permanent loss of capital. This can be done by avoiding unregulated financial products.
- As a thumb rule, avoid any investment that promises high risk-free return. From fixed income investments, don’t expect more than 7% to 9% return. From equities, don’t expect more than 10% to 15% annualized long-term return.
- Prefer fixed deposit and diversified and well managed equity and debt funds for wealth preservation and wealth creation.
Recently, the newspapers have been full of the stories of plights of investors who lost their hard money in IMA scheme (
IMA scam: For these tribal families, life came crashing down).As we were just grappling with the enormity of IMA scam, another story of financial suffering unravelled (
Karvy wealth cheating case). These are not isolated cases (
some more examples of prominent people losing money). Earlier gullible investors lost INR 40000 crore in
Saradha scam. Lot of hue and cry is made but rarely we see investors getting back their money.
Those who promise us paradise on earth never produced anything but a hell- Karl Popper
All these schemes to dupe common people have one common strand – promise of extraordinarily high investment returns. In the latest case of IMA scam, they promised monthly return of 15-20%. To most people, this will certainly smell like a scam. After all, at a time when bank FDs hardly fetch 7% annual return, how can someone deliver 15% MONTHLY return. Sadly, these scamsters are able to ensnare enough people to make a killing. In fact, there is some research which says that the outrageous claims are aimed at attracting the right type of gullible clients (
The Genius Behind Nigerian E-mail Scams).
Most important investment criterion – Return of capital vs return on capital
When investing, we focus mainly on how much return we will get. Most of the time, we take return of capital for granted. However, investors have lost more money when someone fled with their money. Normally, unrealistic promises are made by people who have no intention to honour those promises. When someone makes us lofty promises, we should be immediately skeptical and ask questions. You can read
Five tell-tale signs of a ponzi scheme to know more about the modus operandi of the fraudsters.
Thumb of rule for rational investment return expectation
A bank fixed deposit will fetch around 7% (pre-tax) in current market environment. Debt mutual funds can fetch 7% to 9% return and there could be some tax efficiency as well. Equity mutual funds can deliver 10% to 15% annualized return over medium to long-term. But the returns can be volatile. Sometimes it can be 0% or negative in a year and sometimes 20% to 30% also.
Anyone who promises 15% to 20% fixed deposit like risk-free return in a year is simply lying. Anyone who tells 20% + annualized return should be avoided at any cost. I am not saying that anyone promising high and safe return is fraud. I am simply saying that they don’t know what they are talking about.
Prefer transparent and regulated product
Most of the scams have happened by institutions who were not regulated by RBI or SEBI. PPF, government small saving schemes, fixed deposits by scheduled commercial banks, mutual funds are regulated and are generally more transparent. Totally avoid corporate deposits, even if they offer better return. In past, investors have lost money in corporate deposits by companies like Unitech. Well managed debt mutual funds can deliver slightly better post-tax return than fixed deposit. Equity mutual funds can deliver double-digit post-tax return. Investing in systematic manner with long-term investment horizon can reduce the loss of capital.
Disclaimer: The above content is just for information and should not be construed as an offer to buy or sell or recommendation. Contact your financial advisor for guidance on any investment related query.
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