Mis-selling is rampant in the financial services industry. While legislation may act as a shield in protecting the interests of investors, an investor can take care of the following aspects to minimize instances of mis-selling
I have come across many cases of mis-selling in the financial services industry but the Mangelal Sharma case came a shocker for me (Will this 79-year old’s protest move the government and the RBI to stop mis-selling by banks?, Mangelal Sharma gets his Rs7 lakh back—another Moneylife victory). This was a case in which even an old man was not spared. Banks and financial institutions claim that customers are king for them but in practice they rarely follow this. Why do we have so many cases of mis-selling of financial products? Is mis-selling happening because there is dearth of legislations? The answer to this question is both yes and no. Though there are legislations in place to prevent mis-selling, these legislations hardly help investors. Also investors in many cases are not aware about how to take benefit of existing laws when they have become victim of wrong financial products sold to them.
Whatever is the reason, there are instances of mis-selling in which people lose their hard-earned money and repent thereafter. While legislation may act as a shield in protecting interest of investors, is there any alternate way in which an investor can prevent himself/herself from becoming victim of mis-selling? Though there is no magic wand to help an investor, s/he can take care of following aspects to minimize instances of mis-selling:
Never buy a product aggressively pitched by agents: It is very obvious that an agent or a representative of financial service provider pitches a product based on the commission or fee that he earns. So it is better not to get carried away by what he suggests. You need to understand your investment requirements and select product based on that. One more important point, even if the agent happens to be a family friend, ask him questions. You cannot leave your investments in other’s hand. Products like life insurance are often mis-sold by agents as investment products. Please remember insurance is a product having potential to cover risks.
Never buy a product you do not understand: The golden rule to prevent mis-selling is not to buy a product unless you have understood the product fully. New products keep on hitting the market from time to time. The most recent example was the Rajiv Gandhi Equity Savings Scheme (RGESS). Many investors bought this product because of the fact that this is a good tax saving option, without realizing the risk factors. In past, there have been many instances when Unit Linked Insurance Plans (ULIPs) were sold to investors. The main reason of this mis-selling was lack of understanding of products by investors.
If you are financially illiterate, there are two options. Acquire necessary skills to understand a product or approach a financial advisor. To me the first option looks better. In India, most of the financial products are plain vanilla products which an ordinary investor can understand. The problem with financial advisors is that most of them offer generic suggestions.
Have a check list ready: In order to understand the product, you need to look at facts such as the risk and return aspects of the product. In order to understand product, you can check out some of the details which are as follows:
Keep greed aside: Mis-selling is easy if greed overshadows rational thinking. Many people invest their money in unknown financial products without understanding the product at all, as the greed of handsome return simply overwhelms them. So it is important that you never invest in products which give unbelievable returns.
Never buy financial products when the deadline approaches: If you are in hurry, you will have many worries later on. Never buy a financial product when the deadline approaches, especially the tax saving deadline. Think and plan in advance. Even if you have to buy any such product, buy conventional time-tested product such as PPF, NSC, etc.
Please note that you can mitigate the instances of mis-selling by becoming more vigilant and careful. Take care to ensure that you never buy what you don’t need. Preventive measures against mis-selling need to be inculcated over a period of time.
(Vivek Sharma has worked for 17 years in the stock market, debt market and banking. He is a post graduate in Economics and MBA in Finance. He writes on personal finance and economics and is invited as an expert on personal finance shows.)
The site claims one can earn Rs15,000 a day by just posting links and that it has Yahoo, Google, Bing etc, as its top partners
In the past we have seen Speak Asia Online, the multi-level marketing (MLM), company spreading its wings under the pretext of online surveys. In the same way another online company—Automated Paydays India (http://india.automated-paydays.com) claims one can earn Rs15,000 per day by just posting website links. On visiting the site the company claims to be advertised on Sun TV, CNN-IBN, Times Now etc. The company also mentions that it has partnered with Google, Yahoo, Bing, etc. It mentions that over 3,000 people all over India have joined. There is an American version of the site as well. The claim is that one can make money by posting links from home.
There have been many complaints online that apart from the joining fee it tries to sell different products which are supposed to ‘enhance’ your “work from home” business. One should not fall for its refund guarantee. There have been several instances as well where people have filed for refunds but have not yet received it.
After entering a few details to check if you are eligible, you are taken to another page which is a “Special Report” by one of its top home consultants. Here is what the page mentions on how one can make money,
“Put it this way: To post one link takes between 3 to 4 minutes. To be conservative, let's say it takes 4 minutes. Well, if you post one link every 4 minutes, and you do that for 60 minutes, that amounts to 15 links in just 60 minutes. And the average amount you make per link posted is Rs1,500.*
Let's do the math: 15 links for Rs.1,500 each equals Rs22,500. That's you earning Rs22,500 for 60 minutes of work! If you do this five days a week, you can make Rs1,12,500 a week... Rs4.5 lakh a month... and Rs58.5 lakh a year!* And that's just 1 hour a day, I do at least 3 hours per day Monday to Friday keeping the weekends to myself."
Towards the end of the “Special Report” it puts an earnings disclaimer mentioning that, “Even though this industry is one of the few where one can create their own earnings, there is no guarantee that you will earn any money using the techniques and ideas in these materials”
One can enroll by paying $19.97 (supposed to be a special discounted rate from $90). The payment goes to a company—ClickSure, which is based in Mauritius. Where is Automated Paydays based? Well, we are not really sure but in their terms and conditions document they mention that correspondence can be made to iNet Cubed in the United Kingdom.
The website has been running since October last year. Nearly 40% of the visitors to the site are from India.
When launched, this would probably be the first equal weighted index ETF in India. Should you invest?
Motilal Oswal Mutual Fund plans to launch an open-ended index exchange traded fund (ETF)—MOSt Shares CNX 100 Equal Weight ETF (MOSt Shares C100). The scheme would invest in the securities constituting the CNX 100 Equal Weighted Index which would be an index owned and operated by India Index Services & Products (IISL). The index comprises the same constituents as CNX 100 Index (free float market capitalization based index), but for the CNX 100 Equal Weighted Index, each index constituent is allocated fixed equal weight of 1% at each re-balancing. The weights are re-adjusted to 1% on a quarterly basis as well as at the time of index constituent replacements. Motilal Oswal MF in the past has launched an open-ended fundamentally weighted ETF Index—Motilal Oswal MOSt Shares M50 ETF (MOSt Shares M50). This scheme was launched in July 2010 and has a corpus of around Rs75 crore. In terms of performance this scheme has disappointed. For the one-year and two-year period ending 29 April 2013, the scheme returned 10.73% and -2% respectively. The CNX Nifty returned 13.34% and 1.33% respectively in the same period. Investors would now have a new option. Would an equal-weighted index be a better option to a market-cap based index?
Stock indices typically weigh holdings by free-float market capitalization—or in other words the total value of a company’s shares outstanding. Thus, the biggest stocks command the highest weightage and sway returns. Earlier we have seen how heavy-weight stocks skew the returns of an index (Read: Why Sensex is not the barometer of the Indian economy). And just recently we saw how Infosys results dragged down the Sensex.
Although both indexes are comprised of the same stocks, the different weighting schemes result in two indices with different properties. In market-cap weighted indices investors get a larger stake in mega-cap companies and smaller positions in stocks that have a significantly lower market-cap. Take for example the CNX 100 index, the top 10 companies by market-cap command nearly 50% of the total weightage of the index. And this includes big names like ITC, HDFC, ICICI Bank and Reliance Industries. At the other end, the bottom 10 companies command a total weightage of just 1.55% in the index. Some of the companies here include Mphasis, Ashok Leyland, IDBI Bank, Steel Authority of India (SAIL) and Petronet LNG. Though one might end up having a low allocation to under-valued stocks, we would also need to see how have such indices performed in the past?
In January 2003, the S&P 500 Equal Weight Index (EWI) was created—an equal weight version of the popular S&P 500 Index. The charts below compare the returns of the two indices over a five-year and 10-year period. The returns of the $4 billion exchange-traded Guggenheim S&P 500 Equal Weight ETF is said to have outperformed the market-cap weighted S&P 500 index by a percentage point or so over the past three years.
In a research on equal weight indexing by Standard and Poor’s, they mention that historically, the S&P Equal Weight Indices have outperformed their market cap weighted equivalents in the long-run. The level of performance has also varied considerably under different market conditions. Equal weighting demonstrates long term outperformance internationally as well.
However, many investors are cautious about investing in equal-weighted indices as even though the exposure to mega-caps is reduced, at the same time you are dramatically increasing your exposure to small and midcap stocks, which tend to be more volatile. Over the past ten years, the S&P 500 EWI has shown a higher volatility as compared to the S&P 500. The volatility of the S&P 500 EWI has remained between 4.6% and 5.2%, higher than that of the S&P 500 since April 2009, according to the research paper.
Equal weighted indices have higher market capitalization turnover than their parent indices due to the rebalancing of the indices on a quarterly basis to equal weights. The research paper mentions that, “During the period of the five years ending in 2009, the average annual turnover for the S&P 500 EWI has been over eight times that of the S&P 500 (28.1% and 2.8% respectively). However, the S&P 500 has a very low turnover relative to most indices.” This could be an issue with the fund company, the investor need not worry about this as total expenses for ETFs are capped at 1.50% and can go up to 2% if the scheme is able to meet the criteria for additional expenses.