How to Identify Red Flags in an Investment Platforms

However, not all platforms & opportunities are trustworthy, and there have been many instances where investors have fallen prey to fraudulent schemes due to a lack of due diligence. Whether investing in stocks, crypto, mutual funds, bonds, P2P lending, or alternative investments, recognizing red flags can save you from probable financial losses. 

This article is an extensive guide on how to identify potential red flags in an investment platform. We have also mentioned some examples for easy understanding and relevance to the Indian audience.

Why is proper due diligence necessary while shortlisting investment platforms and schemes?

• To Protect Hard-Earned Money – Fraudulent schemes & investment platforms can wipe out entire savings & hard-earned money, making due diligence extremely crucial for financial security.
• To Ensure Regulatory Safety – Investing in unregulated platforms with questionable compliances and promoter background may expose you to issues with legal & government authorities.
• To Maintain Adequate Liquidity – In many cases, platforms or schemes restrict withdrawals or delay payouts, making it difficult to access funds when needed.
• To Prevent Data Misuse – Fraudulent platforms may misuse personal and financial data for scams or identity theft.
• To Ensure Long-Term Stability – Many platforms or schemes, during their initial days, make payouts on time but later flee away. Consider platforms with a strong track record and compliance history to ensure sustained growth.

10 Red Flags to Watch for When Evaluating Investment Platforms

Lack of Regulatory Compliance

One of the most important factors to check while evaluating an investment scheme or platform is whether it is registered with the necessary government authorities in India. In India, SEBI (Securities and Exchange Board of India) regulates stock market platforms, while RBI oversees NBFCs and P2P lending platforms. Insurance-related products & platforms are regulated by the Insurance Regulatory and Development Authority of India (IRDAI), and deposit schemes by RBI and the Ministry of Corporate Affairs (MCA).

How to Check Compliance:

• Make sure the product being offered by the investment platform is allowed in your country. 
• Look for registration numbers on the platform’s website and cross-check them on SEBI’s or RBI’s official websites. Most platforms also display certificates from these authorities on their platform which you should check for genuineness. 
• Ensure the platform is compliant with tax regulators for GST, TDS, etc. for applicable transactions.

Example:
A platform promising high returns on equity investments but lacking SEBI registration should raise suspicion.

Forex trading platforms that are banned in India.

Promises of Unrealistic Returns

If any platform guarantees abnormally high returns with minimal or no risk, it’s a major red flag. Most investments fluctuate based on several factors like market conditions, and come with their own set of risks involved. No investment is 100% risk-free.

How to Identify Unrealistic Returns:

• Compare the promised returns with standard market rates (e.g., bank FDs, bonds, and mutual funds average returns).
• Be cautious of schemes making tall claims like”triple  your money in a year” or “get daily guaranteed profits.”

Example:

Gurgaon based company, BikeBot lured investors with “double returns” schemes and later turned out to be fraudulent. Many investors lost crores due to the promise of unrealistic gains. Similarly, a new scam was unearthed in Mumbai- Torres Jewellers which promised ‘11% weekly returns’.

 Opaque Business Model

A legitimate investment platform should clearly explain how it works & are able to generate returns for investors. If the platform avoids answering questions about how they earn money or uses overly complicated terminologies without transparency, be cautious.

Possible Warning Signs:

• There is no disclosure of investment methodology or how the funds are invested.
• Vague claims like “Algo-powered trading with 100% accuracy.”
• Non-availability of extensive past performance records or financial audits.

Example:
An investment app claimed to generate profits through “AI-driven trading” but did not disclose its trading strategies or financial audits. Eventually, investors found out it was a Ponzi scheme.

No Clear Withdrawal or Exit Policy

Many investment platforms allow easy deposits but create restrictions when you try to withdraw funds in the name of KYC issues & others. Delayed payouts, increased withdrawal fees without earlier communication, or making X number of referrals compulsory before withdrawing own money are classic signs of trouble.

What to Watch Out For:

• Compulsory lock-in periods without prior disclosure.
• Hidden/Increased charges on withdrawals.
• No intention of getting rid of the problem causing withdrawal issues for a long time.

Example:
A few crypto trading platforms in India restricted withdrawals in 2021 citing “technical issues,” leaving investors stranded with no access to their funds whereas in reality money has been siphoned off.

 Poor Customer Support

A genuine platform offers accessible customer service via multiple channels such as email, phone, social media, live chat, etc. Many platforms in India have RM dedicated to every investor who becomes a single point of contact. If the support team is not responsive or provides very vague answers, it could indicate some problem with smooth operations of the platform.

Key Signs of Poor Support:

• No physical address or direct contact details.
• Templated responses for support queries.
• Support team members provide no clear answers.

Example:
A famous invoice discounting platform in India stopped responding to user queries about delayed redemptions, leading to panic among investors. It was later discovered that they mismanaged funds and filed for bankruptcy.

Pushing for Referrals- Referral-Based Incentive Schemes

Fraudulent investment platforms often pressure users to get more members to sign up offering significant referral incentives. This is a typical Ponzi scheme structure where returns depend on getting new investors.

Signs of a potential scam:

• Referral incentives that promise higher returns/huge incentives for adding new members- oftentimes increasing with the number of referrals you get in total.
• Social media influencers promote schemes without financial credibility and without having any skin in the game- solely for the sake of incentives and payouts offered to them.

Example:

GainBitcoin, a major crypto scam in India launched in the year 2015, encouraged investors to recruit others, operating like a pyramid scheme before collapsing. Similarly, SpeakAsia- which claimed to be an online survey platform provided heavy incentives to users to recruit other members, only for it to be exposed as a Ponzi scheme.

Unverified User Reviews and Fake Endorsements

There have been many instances where many platforms have flooded social media with dummy positive reviews, celebrity & influencer endorsements, etc.. It is prudent to cross-check reviews on neutral third-party websites & verify their genuineness, go to trusted blogs and forums for reviews, etc.

How to Spot Fake Reviews:
– Overwhelmingly positive reviews with no constructive feedback. No negative reviews were spotted anywhere.
– Identical reviews across different platforms- all posted at the same time- for instance, 100 reviews posted on the same day or week and nothing after that.
– Influencers with no financial background endorsing the platform.

Example:
In 2023, an unlicensed stock trading app falsely claimed endorsement by prominent Indian YouTube influencers, misleading investors into signing up.

 No Physical Address or Credible Team Information

A genuine investment platform should have a registered office, known founders (, and a clear team structure. The lack of these details suggests an attempt to operate anonymously & not be transparent. Be shameless and even search for a few employees on social media like Linkedin to verify their credibility.

Red Flags:

• Only an email address or social media handles for contact with no physical address mentioned.
• No information about the founders or advisory team. Mentioning only the irst names of the founders, having vague details as experience.
• Fake LinkedIn profiles with no photos & past employment history.

Example:
A P2P lending company failed to provide company registration details and operated solely via channels like WhatsApp, Telegraph, etc. and a very basic web page. It turned out to be a scam after collecting lakhs from investors.

 Poor Website Security and Terms of Service

Check for proper SSL encryption (“https” in the URL), detailed Terms & Conditions/Terms of Use, privacy policy, etc. Most decent platforms also have pages dedicated to grievance/escalation matrix, contact us page having detailed addresses, etc.

Example:
A fraudulent fixed deposit platform imitated a well-known bank’s website but had no secure payment gateway, leading to users losing their deposits.

 Lack of Past Performance and Track Record

While we all know that past performance doesn’t guarantee future returns, a genuine investment platform should provide detailed historical data, including past returns, possible risk factors, etc.

Example:
A real estate crowdfunding platform promised 20% returns but had no record of past investments, making it a highly speculative and risky venture- subject to several internal and external factors that were not even disclosed to the investors.

Conclusion

Fraudulent and unreliable investment platforms continue to evolve, impacting uninformed investors. By staying vigilant, and cautious and conducting proper due diligence, Indian investors can safeguard their hard-earned money. Avoid too-good-to-be-true promises and prioritize return of capital over return on capital. If you have any queries, seek advice from financial planners & professionals before investing.