A mutual fund is a professionally managed company that collects money from many investors and invests it in securities such as stocks, bonds and short-term debt, equity or bond funds and money market funds.
Mutual funds are a good investment for investors looking to diversify their portfolio. Instead of betting everything on one company or sector, a mutual fund invests in different stocks to try to minimize portfolio risk.
The term is typically used in the US, Canada and India, while similar structures around the world include the SICAV in Europe and the open-ended investment firm in the UK.
What are unregulated deposit schemes?
There have been
many cases where gullible investors have been lured into investment schemes that promise higher returns than those available in the market without much downside risk. Such unregulated investment schemes are called Ponzi regimes and come with very high risks. Unregulated escrow schemes are escrow schemes undertaken by individuals, groups of individuals or a company for commercial purposes who are not registered with any of the nine regulatory authorities responsible for supervising all types of deposit schemes in India. These schemes usually promise very high returns with little to no risk.
Thousands of investors lost their hard-earned money in many of these unregulated deposit schemes, and this forced the government to pass the Banning of Unregulated Deposit Schemes Act in 2019. This law lists regulated escrow schemes and also includes investment options such as mutual funds and portfolio management services (PMS) that are not conventionally considered as deposit schemes.
When you come across an investment option that looks very promising with very little risk, remember that risk and reward always go hand in hand. There is no free lunch in the world and a higher return will always come with higher risk than an investment option that offers a lower return. Unregulated deposit schemes aim to cheat small investors who do not understand this trade-off between risk and return. These fraudulent schemes operate solely by luring investors into schemes with attractive returns without mentioning risk.
The greatest risk of non-regulated investments is that the return is not guaranteed and there is a high probability that the sponsors of the scheme will not comply with the payments promised under the scheme. Since the scheme is not registered under any of the nine regulatory authorities listed, you cannot approach them to recover your money in case the scheme turns out to be a fraud.
The Nonregulated Deposit Schemes Act 2019 makes it illegal to take such deposits, fraudulent default on payments promised to depositors or even the promotion of such schemes. These offences have been made punishable. So the next time you hear about an investment scheme that promises you a much higher return than you can get elsewhere and doesn’t seem risky, promises to double your money in some time, or promises to make you a millionaire without putting anything at stake, try to check who’s running the schemes, whether the scheme is registered with one of the regulatory bodies.
