Every few years somebody comes to see me who has already lost money. Not in a market fall, where the value comes back eventually. Gone. Handed to an arrangement that paid well for a while and then stopped paying at all. They usually come because a relative told them to get a second opinion about what is left.
I want to be careful writing about this, because the people involved were not foolish and I have no interest in making them feel worse. But the pattern is consistent enough that describing it might stop it happening to somebody else.
They trusted a person, not a structure
This is the thread through every single one.
The money was handed to somebody known. A neighbour, a colleague, a relative of a friend, occasionally somebody respected in the community. That person was often sincere and had frequently put their own money in too.
What was never checked was the structure behind the person. Where the money actually went. Who held it. What happened if the person disappeared or the arrangement collapsed. The trust in the individual substituted for any of that.
A mutual fund works the opposite way. Your money goes from your own bank account to a named scheme, the assets sit with a custodian, and confirmation arrives independently from a registrar. You don't have to trust anybody personally, which our page on how mutual funds are regulated explains.
The returns were stated in advance
Every one of these arrangements named a figure. A fixed monthly amount, or a multiple over a set period.
That alone should have been the warning. No legitimate market-linked investment can tell you in advance what it will pay, because nobody knows. The arrangements that do state a figure are either deposits, which are regulated and clearly described as such, or they are something else.
The figure was usually attractive but not absurd. That's deliberate. An absurd number frightens people. A number slightly better than a deposit sounds like good management.
It paid, for a while
This is the part that makes it so hard to walk away from.
The early months or years paid exactly as promised. People received the monthly amount, told others, and invested more. The payments were real, which felt like proof.
What they often were, in fact, was the money of later investors being passed to earlier ones. That works for as long as new money keeps arriving faster than payments go out. When it slows, it stops, and it usually stops all at once.
The people who lost most were frequently those who had been paid reliably for the longest, because they had the most confidence and had put in the most.
Cash, or a personal account
In almost every case, money was handed over in cash or transferred to an individual rather than to a named institution.
Sometimes there was a receipt on letterhead. Sometimes there was a certificate that looked official. None of it connected to any regulated entity that could be checked.
This is the simplest test there is. If money is not leaving your own bank account for a named, verifiable scheme, the protections you assume are simply not present, whatever the paperwork says. Our guide on checking whether somebody is registered takes two minutes.
There was urgency
A limited window. Only a few places left. The rate would come down next month. Get in now while your relative can still arrange it.
Urgency serves one purpose, which is preventing the pause in which somebody might ask a question or mention it to a family member who would ask. Every sound investment will still be available next week.
It was called something familiar
Often these arrangements borrowed a familiar name. A committee. A deposit. A fund. A savings scheme.
A legitimate chit arrangement among people who know each other is a real and old institution, and our page on mutual funds versus chit funds treats it with respect. The version that collects from strangers and promises a return is something else using the name.
The word on the receipt tells you nothing. The structure behind it tells you everything.
Why sensible people fall for it
This deserves a section of its own. The assumption that only careless or greedy people get caught is wrong, and it is part of why others get caught next.
The people I have met were cautious by temperament. Several had avoided equity entirely because it seemed risky. That is exactly what made the arrangement attractive: it promised the steadiness of a deposit with a slightly better number, and it came through somebody they trusted.
Caution about markets does not protect you here. It can push you towards anything that sounds steady. What protects you is checking the structure, and that is a different habit from being careful with money.
The ones who got out early
Occasionally somebody tells me they were in one of these and withdrew before it collapsed. The story is instructive.
It is almost never that they saw through it. Usually they needed the money for something, asked for it back, and got it. They were lucky in their timing, and the people who stayed longer paid for the payments that made it look sound.
Which is uncomfortable, because it means the early payouts that convinced everybody were funded by the latecomers. Getting out early is not a strategy. Not getting in is.
What I say to the families afterwards
Mostly I listen, because they have usually already heard what went wrong from everybody else.
Then I suggest two things. First, find out through a consolidated statement what legitimate holdings still exist, because people in this position often forget what they have elsewhere. Our page on the consolidated account statement covers it.
Second, don't try to win it back quickly. The instinct after a loss is to reach for something that promises to recover it, and that instinct is exactly what the next arrangement is waiting for.
The checks, in one place
- Does money leave your own bank account for a named institution? If not, stop.
- Is a return stated in advance for anything that isn't a bank deposit? If so, stop.
- Can you verify the entity and the person independently? If not, stop.
- Is there pressure to decide quickly? If so, wait a week and see if the pressure survives.
- Does confirmation arrive from somebody other than the person you gave money to? If not, stop.
If it is somebody in your family offering it
The hardest version. Saying no to a relative carries a cost at every wedding for years.
What works is making it about the structure rather than about them. Ask where the money is held and who confirms it. Ask whether it is registered, and with whom. A sincere relative who believes in it will usually try to find out, and the answers, or the lack of them, settle it without anybody being accused of anything.
Our post on the relative who tells you what to invest in covers declining advice from family more generally.
Why I write about this at all
Partly because it happens in this state more often than it gets discussed, and the losses fall hardest on households that can least absorb them.
And partly because the defence is so simple and so rarely applied. Not financial knowledge. Just a habit of checking the structure rather than the person.
If somebody has offered you something and you would like a second opinion, bring it. There is no charge and no obligation, and the most useful thing I can sometimes say is that it is not a mutual fund at all. Myfolios is an AMFI-registered mutual fund distributor (ARN-145870) working from Indore since 2014.
