The promise of high returns can seduce the most conservative of investors. Why settle for the safe 8-9% offered by a bank fixed deposit when you can earn almost double from other investments? This pitch is drawing small investors to new-fangled investments, ranging from the relatively safe corporate fixed deposits and non-convertible debentures ( NCDs ) to the complicated forex and commodities trading, even exotic avenues like art.

Many of these investments were being recommended only to the ultra-rich, who could afford to take high risk. Now, however, they are being aggressively peddled even to small investors.

Advertisements on prominent websites invite you to start trading in forex and earn big bucks within a matter of weeks. Bank executives goad you into taking a shot at their highly successful portfolio management scheme. Brokers exhort you to consider dabbling in commodities futures, sharing sure-shot winning tips that can make you rich. You are promised double-digit returns. In some cases, you are even ‘guaranteed’ the returns.

ET Wealth has repeatedly warned readers that high returns come with high risk. This is why we decided to examine some of these investments to explain the risks they entail and the returns you should expect. Here are some of these options:

1) Foreign stocks

Not many investors know that the RBI permits an individual to invest up to $200,000 (roughly Rs 1.2 crore) abroad in a financial year. Just like you buy stocks of Indian companies, you can invest in foreign equities as well. However, very few investors make use of this option. There are several brokers who provide an online platform to access global equities. ICICI Direct, Kotak Securities and India Infoline have been offering this service for a while now.

Saxo Bank has recently entered the fray, offering Indian investors access to 29 foreign exchanges across the globe through its online platform. Another portal, Duniya Trade, allows purchase of stocks listed on the US stock exchanges.

What are the risks?

Equity is an inherently risky investment, but foreign stocks are riskier than domestic equities. The biggest risk in investing abroad is that involving the exchange rate. If the currency of the country in which you have invested depreciates against the rupee, your returns will be eroded. You will get a lesser amount once the foreign currency is converted back to the rupee. This may seem a remote possibility in the current situation, but if the rupee strengthens, your investments in the US stocks could suffer.

Should you go for it?

The past returns show that no single market can remain the top wealth creator for more than a couple of years at a stretch. So, if the Indian economy sputters at 5%, the stock market will not be able to generate very high returns. However, the investors who have some exposure to other global markets will be cushioned against the decline in the domestic markets. This benefit of diversification is multi-pronged because you are investing in a different country, with a different currency.

Rudra Dalmia, managing director, Saxo India Financial Services, says that foreign equity is not as exotic as it is made out to be. Having a portion of one’s savings in foreign equity is not a luxury, but a necessity in an increasingly globalised world. We must diversify geographical and currency risk, just like any other risk, he says. Even so, don’t park more than 8-10% of your equity portfolio in foreign stocks.

  2) Forex Trading

The rupee has been in a free fall for a few months now. You can gain from the decline by trading in the forex market. However, don’t fall into the trap of forex trading portals, which advertise their services with promises of spectacular returns. These portals boast that their clients ‘earn $100 every day’ or ‘turned $500 to $3,000 in one month’ through margin trading.

This is not allowed because the RBI rules say the money transferred abroad can be used for investments, not for speculation. Therefore, such margin trading on foreign portals is unauthorised and could lead to legal action. However, the forex trading facility available on the Indian exchanges is completely legitimate.

What are the risks?

Like speculation in stocks, forex trading is a zero sum game. One trader’s profit is another trader’s loss. So, anyone who trades needs to be extra careful. The positions are leveraged and, therefore, the risk is amplified 10-12 times. You can also buy forex derivatives, such as put and call options, on the NSE, which limit the risk to the premium paid.

However, these are sophisticated financial instruments, so be sure about what you are buying before placing your order. Most of the trading in the forex futures takes place in the US dollar, the euro, the UK pound sterling, and the Japanese yen. Right now, you can only buy the US dollar forex options.