Mutual funds: Greed could lead

There are several dubious schemes operating in the market. The promoters of such schemes float companies with attractive names. They start in a particular area and then,upon attaining saturation of member enrolments,keep shifting over to newer areas. Some of the many schemes that are designed to entrap the gullible public by luring them with the promise of becoming rich overnight are money circulation schemes,multi-level marketing schemes,network marketing,and self-employment yojana etc.

MLM COMPANIES

MJ Annam,a retired school headmistress,invested R 1.50 lakh in a scheme floated by Unipay2u Marketing Pvt Ltd. This Malaysian outfit mobilised funds from Annam and other investors offering to repay R 12,500 every month for one year and at the end of the year refund the original investment of R 1.50 lakh. “The company’s agent paid me R 12,500 for two months. After that payment stopped. The agent was not to be traced and the company stopped responding to my mails and calls. I can’t go to Malaysia looking for them. They trapped me with their 100 per cent return offer,” Annam said.

MLM companies,or money chain firms,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 “honour” their members with titles like silver member or gold member. Such schemes are called ponzi or pyramid schemes,which are like a pack of cards that,with time,become unwieldy and eventually collapse.

By enrolment into such schemes,one gets back some or the full initial investment and then keeps gaining financially by enrolling new members. So,the second set of enrollees 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 a large number of investors.

CHIT FUNDS

Orissa’s Balasore chit fund scam involving Fine Indisales Pvt Ltd is still fresh in the memory. Over R 100 crore was invested by rickshaw pullers,taxi drivers,shopkeepers and tea shop owners in the online chit fund scheme,which collapsed two years ago. Investors who deposited R 10,000 to R 25,000 each are now running from pillar to post for the recovery of the invested corpus. 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 will subscribe a certain sum of money by way of periodical instalments over a definite period and that each such subscriber will,in his turn,as determined by lot or by auction or by tender,be entitled to the prize amount. “Most such investment options are ponzi schemes where the money from the new investor is used to paying the older customers and till the operators are successful in rotating the money the show runs and as soon as they fail to do so,they go bust and run away,” explains Sumeet Vaid,a Mumbai-based financial expert. However,it may be noted that there are genuine chit funds run by established companies which are under proper regulatory framework.

PRIVATE PLACEMENTS

The Supreme Court recently asked a business group to refund R 17,400 crore to the investors along with 15 per cent return. Sebi is reportedly receiving hundreds of calls for refunds of the amount every day since the judgment was pronounced. The said amount was collected by over 2.2 crore investors across India.

Many companies offer equity shares/ convertible debentures/ preference shares etc to the public through the private placement route,often for 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. Finance companies take deposits from the public,promising them unusually high returns.

Since these are unsustainable,ongoing repayments of interest and deposit amounts depend on 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.

It is important for the investors to go through the red herring prospectus carefully whenever buying any new product or an instrument that offers ‘high’ returns. The most important point to verify is that whether such schemes and companies are registered with regulatory bodies like the Reserve Bank of India and the Securities and Exchange Board of India.

EMU FARMS,PLANTATIONS

The spectacle of emu scam was unravelled recently with the arrest of Susi Emu Farm chairman MS Guru in Tamil Nadu. The complainants stated that they invested huge money in the emu bird farming run by Guru who assured a monthly income of more than R 6,000 per investor. However,the monthly payments dried up recently and the firm did not respond to their pleas about the non-payment. Nearly half-a-dozen emu farms shut down recently,leaving thousands of birds and investors in the lurch.

Many companies offer schemes that multiply money by investment in plantations,emus,goats and even pigs. Most of such companies are not registered with the Sebi,and typically have fled with the investors’ monies. Remember that there is no free lunch and that there is some catch when some one offers to make money for you easily and quickly.

“If an investor comes across an scheme which looks too good to be true then it is better to stay away from it. It will be foolish to get greedy,as the saying goes,the fool and his money soon part ways,” says Dhirendra Kumar,MD,Value Research.

So any get rich quick scheme or high returns schemes should be viewed with lot of suspicion. If you lose money,seeking help from the government might not be an option.

—ritukant.ojha@expressindia.com