Avoid ‘Get rich quick schemes’ of  unscrupulous borrowers - Financial analyst | Sunday Observer

Avoid ‘Get rich quick schemes’ of  unscrupulous borrowers - Financial analyst

1 November, 2020
Ravi Abeysuriya
Ravi Abeysuriya

Investors should not be carried away by ‘Get rich quick schemes’ of borrowers offering fabulous returns at high risk which will result in the loss of hard-earned money of depositors, said financial analyst and Past President of Colombo Stock Brokers Association, Ravi Abeysuriya in response to the fear psychosis that has been created with regard to the safety of deposits in financial institutions.

He said the saying, “Fools rush where angels fear to tread” should be a guiding principle in investing to avoid pitfalls and regrets. “Do your homework before rushing to invest. All that glitters is no gold.  Look at the risks without considering only the returns. Many ended up losing money because they ignored the risk-return aspects of investment,” Abeysuriya said.

He said the unscrupulous will often talk high of the returns to appeal to your greed and rely on your ignorance of risk. You need an independent third party to clarify risk. Do not believe in the sales talk. You will often hear them say, “Your investment is guaranteed. There is no way you can lose your money”. 

Beware of investments that look too good to be true as they will most likely end up in a total loss to you. Don’t be carried away by ‘Get rich quick schemes’ such as pyramid schemes (where you are promised payments if you introduce more members to the scheme).

TV commercials, newspapers advertisements and salesmen calling on you promote a variety of investment options and financial services.

Make no mistake, the borrower himself cannot give a guarantee because the grantor is legally required to repay the loan on its due  date. Only a financially strong third party can give you a guarantee that if the borrower defaults they will come forward and repay the loan.

If a loan or an investment is guaranteed, the guarantee by the third party should be unconditional and irrevocable, enforceable under all circumstances.

In other words the guarantor should not be able to find a way out of not honouring the guarantee when the borrower defaults. Do not yield to high-pressure sales tactics. Thoroughly investigate the investment product  offered and find out the risks involved before investing.

Genuine borrowers will be happy to provide you with independent analysis’ research reports and credit ratings and give you time to make an informed decision. 

A credit rating is a quantified assessment of the creditworthiness of a borrower in general terms or with respect to a particular debt or financial obligation.

It  not only determines whether or not a borrower will be approved for a loan or debt issue but also determines the interest rate at which the loan will need to be repaid.Most importantly one should invest only in licensed, regulated financial institutions. However, attractive the proposition may be  if it is not a licensed regulated financial institution you do so at your risk.

Be very suspicious of persons who claim to be representing well known organisations who may take you money giving you fake certificates.

After investing one needs to continuously monitor his or her investments to see whether they meet the goals and are within the risk tolerance level. Follow markets trends driving interest rates and the stock market.

When one invests in any investment product other than Government Bonds, which is risk-free, there is an element of default risk which is due to the institution failing to honour its commitment such as in bank savings and fixed deposits, corporate bonds or debentures, insurance claims and finance company deposits.

Investors should use credit ratings to determine whether the risk of that investment meets one’s risk tolerance level and the return offered is adequate for the risk taken.

If one fails to verify the risk using a simple tool such as a rating (which is free) when making these investments he or she is bound to make a mistake.

Without knowing the rating, the investor will have to make decisions based on the popularity of the institution.

A majority of investors in Sri Lanka have only a vague idea of the risk involved  in investing as they do not undertake a thorough investment appraisal.

They assume that the government will come to their rescue if the institution they invested on goes bust. Most investors only look for returns ignoring the risk factors. They rarely take into account default risk. In Sri Lanka we have not had banks defaulting but had several financial institutions failed resulting in depositors losing money.

“Every investment comes with a risk. Risk is the possibility that the investment’s actual return will be different than expected and includes the possibility of losing part or all of the original investment.

In fixed interest products such as fixed deposits and debentures there is default risk and purchasing power risk (the returns being lower than inflation where one cannot buy the same amount of goods that he or she bought before the maturity proceeds of the investment).Investment in shares, unit trusts and gold have market risks or volatility (day-to-day fluctuations of prices due to the behaviour of sentiments of investors  and other factors). Property investments have liquidity risks where one may not be able to convert them to cash. It is vital for investors to know their risk tolerance level.

The amount of psychological pain one is willing to suffer for the investment.  A professional investment advisor will provide all the risks involved in an investment before talking about the returns which is the opposite for unscrupulous advisors.