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I have numerous messages & mails asking me the following:I am okay with slightly lower returns but I don’t want any risk. Can you suggest some investments?What is the best investment option for next 5 years?I have invested in the X, Y & Z mutual funds. It this right investment?I am investing in a real estate project. What returns can I get & is it safe?A friend of mine has recommended a fixed return scheme of a company promising 20%. What can go wrong?A brokerage house recommended me XYZ limited company bonds promising 15% returns guarantee. Should I invest?Markets are falling continuously, should I withdraw my money?My portfolio looks like A, B & C investments. Is this the best way to make money?You have recommended some funds as good. How much returns can I expect after 5 yrs?What minimum returns that I can expect as a guarantee if I follow your recommendations?The list goes on.Needless to say, there is no easy answer to the above. Aside, I find it difficult to take time & explain on such queries because I’m sure the message will not get across just in one mail, specially since I don’t know the “individual or personality” on the other end of the line. Here is an attempt to answer some such queries & why those are difficult to answer specifically. Something that every investor should know about investing.Look at the following examples of recent investment scams in India. You need to figure out the common themes in all of them:Home Trade ScamHome trade scam was a 600 crore scam which affected 25 co-operative banks (13 of them were from Maharashtra and 12 from Gujarat). Home Trade was a Navi-Mumbai based brokerage firm which was founded by Sanjay Agarwal. Surprisingly this firm invested 24 crore in promotional campaigns to attract investors, and hired Sachin Tendulkar and film stars Shah Rukh Khan and Hrithik Roshan for its advertisements. This firm and four of its affiliates tempted cooperative banks with 2-7 percent higher returns on investment. The brokerage firm also claimed to have bought government securities (G-secs) for these co-operative banks. Ultimately it turned out to be a Ponzi scheme & depositors lost money.Platinum Firm or Plantation business ScamIn mid 1990s, many firms were subjected to no guidelines. Hence the then budding companies easily got away with profit protrusions. One such companies was Anubhav group’s teak plantation firm. The Anubhav Group has duped investors of over 400 crores. During this period, many such plantation companies came into picture and tricked thousands of investors. As per CRISIL data, more than 4500 plantation companies raised over 25,000 crore from the public during the 1990s. An investor of Anubhav Group said, “Why do people invest in these kinds of firms? Because people want to make more money, fast. What do we get from the nationalized banks as interest? A mere 5-7 percent, whereas Anubhav was paying 21-24 percent interest”.The CR Bhansali scamRoop Bhansali scam CRB was once a top-notch investment banking firm, started by C R Bhansali. Roop Bhansali, through mutual funds, fixed deposits and debentures collected money from investors. With the help of non-existent companies he is raised money and transferred to his other shell companies or others who invested with him. A 1998 Sebi committee on plantation companies headed by Dr S A Dave observed that "Invariably, all the (plantation) schemes have assured or indicated high yields (in the region of 18-30 per cent) per annum on investments. These yields have been worked out on the basis of projected growth and price of the plantations. These estimates vary from company to company and scheme to scheme. The projected yield estimates have been disputed by forestry experts, who have concluded that the yields promised by many of these schemes are optimistic and not achievable."NSEL scamNSEL Scam Money from investors were siphoned off as the most of the underlying commodities did not exist and the buying and the selling of commodities was being only conducted only on paper. Investors were attracted by offering fixed returns on paired contracts in commodities. And it was lately, found out the stocks were missing. The NSEL is a company promoted by Financial Technologies India Ltd (Jinesh Shah) and NAFE.What are your observations on the above scams ? Why did the investors pool in money & lost all of it to crooks ? Why couldn’t they see thru this in time ?This is because of a very basic nature in all investors. They don’t like risk. Ironically, they all were looking to avoid risk while investing here but ended up investing in the riskiest of places. How did this happen? Well because they all were looking for “GUARANTEED” returns. It didn’t matter WHO offered the guarantee. They just wanted to hear the word – fixed returns or guaranteed returns.I can’t emphasize this enough – Apart from the investment in government bonds or bigger bank deposits, there is no guarantee in any of the investments. So a simple answer to some of the above questions is – I don’t know. Because I don’t know your “investor personality”. What is absolutely safe for me is blue chip stocks. But they also fall by 20% to 40% during tough times. This may be too risky for some. Risk is something that nobody can quantify for an individual. It is how you react when you see your portfolio 30% down. If you panic & sell, then you should not buy in the first place. Now we can’t enjoy glorious returns in equity for few years & then move to fixed deposits when market struggles. You can try but it is not a design you can plan your life on. A guarantee is only as good as the person or the company offering it.Having said this, the bigger problem is losing money in search of guarantees. Let me tell you the four red flags of any scam that every investor should know.There are four red flags of any investing scam:1) A reasonably high returns that are fixed or guaranteed: At-least this word would be used by the seller. Unless you are getting a deposit in a prestigious bank, use of the word guarantee is a scam. How much is “reasonably high return”?. Anything more than the bank deposits rate in your country with a guarantee is a scam. I would count even a 10% returns under “guarantee” as a scam in India. In US markets, anything more that 4% is certainly a scam. I quote from a Forbes article:The investment world is a tremendously competitive arena and if there was indeed an opportunity to earn an above market return on an investment. Rest assured that professional capital would have jumped on the idea long before it was presented to you. Remember, institutional investors employ an army of scouts and analysts to look for investments with a slightly better return for an equivalent amount of risk. Risk-free high returns just don’t exist. As for the guarantee, who is guaranteeing it anyway? The person selling the idea?2) Everyone is doing it & getting rich: This creates a reference. While you are still absorbing the “guaranteed returns”, the seller throws names as examples of people why have got rich using the scheme on offer. And some references. Can you actually ever know how much money others have? Never. But you trust still.3) Limited period offer, act with urgency: This is almost certain to follow the scam offer. The seller wants to close the deal fast & limited time offer is certain to get in. Of course, the get rich schemes come with limited time offer. You can’t sit on it for months. By then the scam would be out. I quote Forbes again:Opportunities which require a very quick commitment on your behalf should be another red flag. Purveyors of these scams insist the investment will not be available unless you act immediately. The urgency is aimed to distract you from doing proper due diligence, often because a thorough review of the background of the individual promoting the investments is questionable and an investigation into the person would confirm an unscrupulous history. These time-sensitive deals usually come with little or no legal documentation either, which is a warning sign of its own.4) Don’t tell anyone, this is exclusive offer: Unbelievable as it may sound, most offers are thrown as exclusive. The seller doesn’t want you to discuss with many, lest someone may alert you to such scams. Then there is google also to check. So “don’t tell anyone as it is for select chosen ones” who will get rich fast. Well indeed, you are the chosen one. I quote Forbes again:Ask yourself a question. If there was really a chance to make more than normal risk free return in a short period, why would the person showing you the “investment” share it with you, a total stranger? In these cases, it could be said the greed of the fraudster is matched only by the ignorance of the investor.If you can keep the above 4 red flags in mind, I can bet that you’ll never lose money to investing scams. And that is time well spent on this article. What do you say ?Feel free to mail or write to me on twitterHonest - Unbiased - Simplified, as always.References:Too Good To Be True? How To Spot Investment FraudYet another massive Ponzi scheme goes pop in IndiaTop 10 Investment Scams9 Famous Financial Scams in IndiaImage courtesy: Economic times