During the financial crisis of 2008, many issues that were hidden at that time has come to light now. Yes, there are accounts of many that had made fortunes by playing it smart, but the chances of the same outcomes to repeat itself today is uncertain. This time around, the smart bet is to hold off on risky investments as the covid effect seems to be a long drawn out fight. The longer this crisis lasts, more issues will now come to light.
An individual in UAE, saw his entire savings wiped out by a well-known international bank that even has operations in India. The product is an Indian mutual fund, it was offered to him using a special method which could lead to higher returns. It was for a well-known Indian brand but what the customer did not realize was that it was a leveraged product. The money invested was double that of what the customer had put in, the other half came in as a loan from the bank with the customer’s half used as the collateral.
returns that came with it were positive, the customer was happy, but when the
markets crashed, the bank asked for a deposit of high value to shore up the
collateral. But the customer was unable to do so, which led to the entire holding
being sold off. Nothing could be done against the bank as it was well protected
legally and the matter was also outside Indian regulation.
This could happen in India, but not in the exact same way. One such way is when borrowings are taken against investments and that amount is used to invest more, this may lead to higher margins but at the same time it carries a much higher risk. These kinds of activities are quite common in stocks.
There are various investing and trading tricks that may work well when the market is going up or even dropping in a routine manner. But when economic stress goes up, all the flaws start presenting itself. This is especially true to those businesses that run on debt and the same lies true for those who trade on debt. Usually people fall trap to such schemes through intermediaries whose main motive is to enhance their own profits. A strong regulatory system could help, but it won’t be 100% foolproof.
There are some massive movements going on in the market right now, and this could tempt some skilled sales people to play special tricks on those who have the money to spare. Right now, it is best to play safe and not fall for things that are too good to be true.
Even the most successful investor in history – Warren Buffet, the CEO ofBerkshire Hathaway has taken a safer approach to investing and has advised the same to fellow investors and traders during their annual general meeting.