Zerodha's Nithin Kamath Explains Why You Should Avoid 'Easy Money' Traps

Everyone likes the prospect of their money-making money for them.  The allure of ‘easy money’ or ‘free money’ is very strong, especially given the way these ideas are sometimes promoted on social media and in society at large. However, financial experts often warn individuals against any offer which cites ‘easy money’. Over the years, scammers have deployed several traps to prey on the tendency to be lured by easy money.

On June 24, Zerodha cofounder Nithin Kamath shared a post on the social media platform X and cautioned individuals against falling for such scams. He cautioned investors against chasing easy money opportunities, drawing upon his personal experiences to pinpoint the dangers.

Nithin Kamath On The Scheme That Wasn't

In his post, Kamath mentioned that he recently saw the OTT show ‘Pyramid Scheme’. Notably, pyramid schemes refer to illegal and unsustainable businesses where participants make money by recruiting new members as opposed to selling goods or offering services. In this system, the earliest recruits sit at the top and collect fees from the growing base beneath them, guaranteeing that the vast majority of participants will inevitably lose their money.

He added that watching the show made him reminisce about an anecdote from his early days as an investor and disclosed how he, too, was once lured by such an entity.  Kamath recalled how he was introduced to a seemingly lucrative opportunity at a multilevel marketing company with which he was associated for two years. Kamath added that he took it up to fund his trading activity.

“When I started my career at 18, I was trying to find ways to fund my trading account. For about two years, I got drawn into a multilevel marketing company that turned out to be a pyramid scheme. I don't think I was deceived by the person who introduced me, but by the company itself. Partly because I ended up introducing a lot of people to it too,” Kamath said.

Kamath added that two new schemes launch every day in India, and over 5.5 crore have lost their savings to over 5,300 schemes.

“Even today, 2 new pyramid schemes launch every day in India. Over 5.5 crore Indians have lost their savings to more than 5,300 such schemes, estimated losses of Rs 10 lakh crore as of 2015, likely far higher now,” Kamath said.

Lessons for Stock Market Investors

Kamath spoke about the dangers involved in pyramid schemes, but also pointed out that similar tendencies exist among stock market investors and can be detrimental to them. He added that one of the most crucial lessons he learned from his ‘pyramid scheme’ experience was that the fundamental rules of finance simply cannot be bypassed, and there is no quick and easy way to make money.

He added that often when great claims are made, the risk involved in investing in such schemes is also great.

"One truth my experience has taught me: there is no quick way to make a lot of money, be it trading or any other business. Anything promising returns higher than a bank FD comes with risk. The higher the claim, the greater the risk," Kamath said.

Kamath added that the widespread desire for a quick way to make money has increased investor participation in the stock market. However, he explained why that might not necessarily be a good thing, as a big influx of new stock market participants is often driven by unrealistic expectations.

"This dynamic has also played a big part in the recent growth of retail markets, as people spread the word that it's easy to make money in stocks. It isn't, and the reckoning tends to come quietly, one account at a time," Kamath said.

He was also highly critical of setups masquerading as valid investments.

"And if someone tells you that you can make easy money just by introducing others, run. Almost every single one of those is a fraud," Kamath said.

Avoiding the Easy Money Trap

Pyramid schemes and promises made by malicious entities online of doubling your money or giving you an easy source of income with tips are often traps which harm investors financially. Such entities often use aggressive marketing and unrealistic promises to lure individuals into handing over their money.

While the government and regulatory bodies are actively cracking down on pyramid schemes and misleading stock market tips and claims, the first line of defence is the individual. Ultimately, investors need to curb the temptation to fall for easy money and instead focus on robust financial planning and increasing their own awareness regarding such things.