"Return on investment" is important, but "Return of investment" is critical. Investors easily fall in to prey because of lack of knowledge on regulation. Financial advisor Amit Trivedi advices investors to check regulation before investing their hard earned money in any financial instrument.
"You can fool some of the people all of the time, and all of the people some of the time, but you cannot fool all of the people all of the time." Said Abraham Lincoln. However, a corollary to that should be, "It is possible to fool most of the people for a long time." Many have used the same trick to fool millions. And this has been going on for centuries.
The recent news about StockGuru proved the above statement right - once more.
We have seen numerous schemes (scams) that people have fallen prey to. There have been Teak plantations, Emu farming, Limousine schemes, Multi-level marketing schemes ... the list will go on and on.
All these schemes have some things in common:
1. They promise what looks to be "too good to be true" - relying on our greed
2. They make it look exclusive and not available to all - relying on our ego
3. They operate outside of the regulatory environment - relying on our ignorance of or indifference to the law
The first two are psychological and we have written about these in the last.
Today, we will focus only on the third. For that, it is important to understand regulation in financial services in India:
There are five regulators with regard to investing your money:
1. Reserve Bank of India (RBI) regulates matters pertaining to
- Bank accounts and your deposits with the banks
- Fixed deposits with NBFCs
2. Securities and Exchange Board of India (SEBI) regulates matters pertaining to securities markets, which include:
- Stock and derivative markets and the products listed on the exchanges. These products include equity shares, bonds and debentures, warrants, index options, index futures, stock futures, stock options, currency derivatives, interest rate derivatives, etc.
It is important to note here that the derivative products (including futures and options) are used for objectives other than investment
- Mutual funds and the schemes launched by these funds
- Portfolio management services
- Rating agencies
3. Insurance Regulation and Development Authority (IRDA) regulates matters pertaining to the insurance industry. Since this is a discussion about investments, we will restrict to only investment linked products from the insurance companies. These products are:
- Unit-linked insurance plans
- Various traditional life insurance policies, where some amount would be returned at the time of maturity, if the insured is alive
- Pension plans and annuity products from life insurance companies
4. Pension Fund Regulatory and Development Authority (PFRDA) regulates matters pertaining to New Pension System (NPS)
5. Department of Company Affairs (DCA) regulates matters pertaining to fixed deposits with companies other than banks and NBFCs
Unfortunately, in our country, we still do not have any regulations covering the distributors of financial products and the financial advisors. This means that the banks regulated by Reserve Bank of India for banking operations has enough and more regulations to protect your deposit with the bank, but lacks any regulation whatsoever regarding the investment and insurance products sold to you by the bank. The good news is that these regulations are being considered by the regulators and very soon, we may see a new regulatory regime, which augurs well for the investors.
The distributor or advisor is a critical link in the whole chain as this is the last mile connect. In the absence of proper regulations here, it is left to the investor to be extra careful. This is not to suggest that all the financial advisors are out there to rob the client, but just that the absence of regulations makes life a bit difficult for the investor. In the absence of such regulations, it is important for the investor that you are not mis-sold a product. The basic definition of mis-selling would be that someone sells you something that you may not need or may not be appropriate for you in the given situation.
Check the regulations before investing your hard-earned money. The big difference between regulated and unregulated environments is: the regulator can prevent a loss before it happens. The regulators lay down the rules by which the players can play. A violation would prove very costly. In an unregulated environment, there are no rules and the players themselves lay down the rules - well, there is no one to monitor if they comply to those rules and whether the rules can change - how and when. At the outset, there is no guarantee that the rules (in an unregulated environment) would help the players or the investor.
The regulators also have a process of registration for the players and the products. Ask for the registration number. You can also access details from the websites of the respective regulators.
In the unregulated environment, you can go to the police or the court only after the event, i.e. only after you have incurred the loss. Our legal system allows anticipatory bail, but there is no provision for anticipatory complaint.
Be careful and ensure you know how to get your money back. "Return on investment" is important, but "Return of investment" is critical. Don't get fooled.
Note: The commodity markets are regulated by Forward Markets Commission (FMC). However, I have not included this in the above list since the commodities are physical and not financial instruments. Barring a few metals, in case of all the other commodities, there are only derivative contracts available, used mainly for hedging, speculation and trading and not for investments.