It is best to keep away from unregulated financial instruments if you don’t want to lose your money.

Woman saving money

Vijay works at a construction site. On the recommendation of a coworker, Vijay and many others contributed Rs 2500 each every month into a chit fund that promised lucrative returns over a two-year period. After four months of regular instalments, the workers came to know that the person behind the fund had vanished. While Vijay lost his hard-earned Rs 10,000, the scammer made away with a few lakhs.

Unfortunately, thousands of people like Vijay get swindled of their hard-earned money through so-called lucrative investment deals that go bust.

The chit fund or ‘chitty’ is a well-known investment option among middle-class families and some business communities. The number of people participating in the chit fund corresponds to its duration. For example, a two-year fund will have 24 participants. Each month, one contributor is allotted the collection of the entire pool by the organiser through a lottery system. 

If someone is in urgent need of money, they can bid for the next pool at a discount of 5%, 10%, etc. Of these multiple bidders, the one offering the highest discount wins. The balance amount is distributed among the other members of the group after deducting the organiser’s commission.

In principle, a chit fund is supposed to work as a savings tool, with the opportunity to earn some extra income through participant bids. However, this is an unregulated investment pool. It is done in cash and there is no proof or paperwork involved. It is based on a verbal contract among the members, who may not even know each other.

There is a risk of default not just from the organiser, but also from other members who might have already availed of the lottery. With no paperwork, little can be done in case of dispute or cheating.

Related: Why should women invest in debt funds?

Red flags to watch for

There are several investment products such as Ponzi schemes, pyramid schemes, offshore scams, etc. that aim to deceive gullible investors. But they all follow the same modus operandi:

  • The investment offers supernormal profits, unmatched by standard investment tools.
  • The returns are often guaranteed with no risk to capital.
  • There is very little third-party information about the investment or promoters available in the public domain.
  • There is little to no paperwork involved. Terms and conditions, if any, are ambiguous.
  • The promoters will show how much profit others are making and pressurise you into investing in this ‘once-in-a-lifetime’ opportunity.

Making an informed decision

If you come across an investment opportunity that seems too good to be true, it probably is. Stay away. Some schemes are run by fly-by-night operators who use bogus names and credentials. They target investors in one geographical area and then move on to the next one. Even if the intention initially is not to cheat, the lack of a binding contract and redressal system make it easy for the operators to throw up their hands if things go south.

Considering you willingly invested in a business with no contractual guarantee or security of capital, it will be very difficult for you to get any closure, even if you are able to drag the perpetrators to court. It is, therefore, imperative to conduct adequate due diligence before making any investment.

In India, the Reserve Bank of India (RBI) regulates all financial instruments and brings in a host of checks and balances to safeguard citizens. Similarly, on the capital markets front, the Securities and Exchange Board of India (SEBI) has been entrusted to enforce and monitor all operations. The Insurance Regulatory and Development Authority of India (IRDAI) is the apex body for the insurance industry, and the Pension Fund Regulatory and Development Authority (PFRDA) regulates the pension sector in the country. 

The entire banking and financial system comes under the purview of these four apex bodies. Any investment option that is not vetted by any of these bodies should raise a red flag.

Related: 7 Reasons why women should invest in a SIP

Last words

When presented with an investment opportunity, take your time to understand every aspect of the venture. Ask questions and conduct your own independent research. Examine the credentials of the company and the people behind it. Look for performance indicators and investor reviews. 

You work hard to earn your money, so make decisions that will allow you to reap its rewards! Look at these investment options that can create a regular income for women.