Ask and write down answers to important questions to ensure your financial safety, says Uma Shashikant.
Alot 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 10 lakh when your bank
balance is 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: by Uma Shashikant, The Economic Times, 26/11/2012
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