A lot of people want to know about simple things they can do to protect themselves from fraud. They want to make informed decisions, but wonder if it means learning too many complex concepts and grappling with jargon. I would propose a simple approach.
Before making a financial decision, take a sheet of paper and write down the answers to a few important questions. Do it yourself, or engage your adviser to provide the answers. Keep it brief, to the point.
First, ask for the name of the entity whose product you plan to buy. I have met savvy, smart investors fumbling when asked the name of the issuer. A close friend insisted that the insurance he had bought was actually a mutual fund product by the same promoting bank. However, when he went through the papers, he sheepishly found out the truth.
Many stock operators do not have membership with exchanges. Refuse to deal with them unless you find out about the registered broker in whose name your trade will be executed, so you know who you are dealing with. Ensure you have this name for all your papers, contract notes, documents or whatever you receive as proof of investment.
Second, ask if the entity is accountable to any regulatory authority. The answer has to be Sebi, RBI, IRDA, PFRDA or the government. If only the investors in Stock Guru had asked for this piece of information.
There are elaborate laws on the type of firms that can raise money from the public and under what conditions. Unfortunately, none of the financial regulators have the resources to monitor and prohibit mushrooming operators.
These fraudulent entities have to be checked by local police and booked under criminal law, even if they engage in financial frauds. The best recourse is to ask for the regulator's name. It is mandatory for them to show you proof of their registration if you ask for it.
Third, ask for the document that carries the name of the product and proof that it has met with approvals from a regulator. Do not go by printed pamphlets, advertisements, hand-outs, or presentations. Demand a copy of the offer document, an information memorandum, a detailed formal offer that has the name of the entity you have listed above.
You don't have to read the legalese, you don't need a copy of this voluminous document, but you need to know it exists and that the scheme is not a concoction. Ignore messages that tell you to invest an amount, earn an assured sum, and save taxes. Ask for the name of the product, and ask for confirmation that it exists, and was created by an entity you can identify and confirm.
Fourth, ask how your money will be used and how it will generate returns. Do not accept generalities. If it is an IPO, ask for the business of the company that is raising money. If it is a mutual fund, write down where it will invest.
Will it be equity, debt or gold? If you bought a bond of a finance company, write down its main business. If your money is being used to offer other loans, you know that your return will depend on the quality of those loans. You also need to ask how you can find out what happened to the money.
Fifth, write down your obligations in full. If an insurance agent tells you that you have to pay a single premium, or for only five years, put it on paper. Then ask the agent to show you where it is written that you should pay only this much. Know the fee you have to pay. If the stock broker tells you that you can buy stocks worth Rs 10 lakh when your bank balance is Rs 2 lakh, ask how the balance will be paid and when. If it is a futures contract, ask about the likely margin and how often you will have to pay.
Sixth, ask what you will get, in complete detail. Do not accept any assurance from anyone. If the answer is that your return will depend on the market value of your investment, make a note. Ask how often you will know what the said market value is, so you can evaluate how the investment is doing. If there is a dividend, pen it down and remember that dividend is a discretionary payment.
If it is bond, there are multiple variations of the payment you will get and how. So make sure you understand these choices and are able to note, in rupees, how much interest will be paid to you and when.
Seventh, insist on knowing what can go wrong. Several relationship managers are keen sellers and may only talk to you about the positives for the fear of losing you as a client. Kill this fraud by asking upfront about what can go wrong.
If you are buying an IPO, you need to know that the share price may be lower than the purchase price. If you are taking a bond, you need to know that the credit rating might change.
If you are investing in a mutual fund, you need to know that the returns depend on the market, and can be more or less than the market indices. Write down what you should look out for and ask where you will get the information.
Make sure you know what happens if you do not pay the premium. Eighth, ask if you have to stay with the product for any specific period of time. What are your options if your situation changes? What happens if it does not? Does your credit card have a charge after the first year? Does your loan enable you to pay it earlier? Does your insurance policy allow you to draw some of the funds? Does your mutual fund allow you to redeem money, when needed? Write down this detail in brief, simple terms that you understand.
Review this sheet with your financial adviser. If you invest in a team, "which is a good idea, pool your sheets and review it. Product literature is filled with jargon; take your time to figure out the product on your terms, in your language. In this process, you will either understand the investments better, or you will be able to evaluate how competent and honest your adviser is. Either way, you win.
Source: Economic Times
Additional precautionary measures suggested by Prakash Nair
Note : Please ensure to fill the application form and cheque yourself and don't allow the agent to fill these valuable documents. Don't forget to take photocopies or scanned images of these documents for your future reference in case there is any dispute. Also ensure to cancel all unwanted columns in the application form (eg. Second applicant name, nominee names etc, this will give chances to add unknown names by third parties) write your application reference number/policy number/account number, scheme name and your name, phone number etc. behind the cheque leaf. In case you provide copies of address proof (Passport, ID card etc) or PAN, ensure to write the purposes, name of the institution across the copy to avoid misuse.
a) Don't hand over the cheque to anyone except the agent who sold you the policy. If possible, send it to the insurance/investment company yourself
b) Use net banking to pay premium/installments in order to completely rule out the chance of fraud
c) If net banking is not possible, give ECS mandate to your bank so that your premium/installments is directly debited from your account
d) Don't give photographs or photocopies of any document (PAN Card, passport, phone bill) while renewing the policy
Don't believe your agent/Relationship Manager blindly
Best Regards
Prakash Nair
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