Unscrupulous brokers are not the only ones responsible for investment frauds. The abject financial illiteracy of their victims is also to blame. Babar Zaidi looks at five ways in which investors allow themselves to be conned.

if all you ask an adviser or broker is 'Where do I sign?'

When you open a stock trading account with a broker, you have to sign an agreement that runs into several pages. Who has the time to go through it? Isn't it much easier if he just marks out with an x the places where you need to put your signature? If your answer is yes, get ready to be cheated. Blind faith in your broker can be disastrous, as has been highlighted by the Citibank fraud. Even well-educated and highly-placed people can be taken for a ride if they are too trusting. "It defies explanation. It is incomprehensible why even educated people fall in such traps," says Virendra Jain, founder of the Delhi-based Midas Touch Investors' Association, which helps investors fight for their financial rights.

Fraudsters prey on human weaknesses. They manipulate people by winning their trust. And the best way to do this is by giving an aura of respectability. Ask Rajendra Khosla (see picture). The retired builder wanted to invest in fixed deposits but was sold six insurance policies by a clutch of bank employees in a well-oiled forgery racket. "She worked in the bank so I thought I could trust her," he says. Investors are easily swayed by calling cards of agents. In a nationwide online survey conducted by economictimes.comlast week, 28% of the 1,150 respondents said they would trust an agent from an established organisation. As the Citibank fraud has shown, this trust can be grossly misplaced. if you invest in a scheme because others have ARE YOU A bullish investor? Most people are, but this is because they like to invest in herds. Kochi-based MC Chacko is one such herd investor.

In June 2007, he invested 35,000 in a scheme that promised to double his money in 694 days. Floated by the Ernakulam-based Jyothis Project, the investment scheme was offering an annualised yield of nearly 40%. As expected from such "golden" and "lifetime" opportunities, despite repeated reminders and threats of legal action, Chacko has not even got his principal back leave alone the interest he was being offered. Given that he works for a leading private sector bank and is conversant with interest rates, yields and default risks, Chacko should have seen through the fraud. "I invested because the scheme had given good returns in the past," he says. Does he know of anybody who has earned from the scheme? "I don't know personally but I have heard of people who got good returns," he replies.

This herd behaviour is fodder for Ponzi schemes, also known as multilevel marketing (MLM). The more investors you rope in, the higher is the reward promised to you. In Quantum Fund Online, a Ponzi scheme, an investor is promised an additional 10% for every new investor he brings in.

The temptation is so great that even informed investors can throw caution to the wind. As a business development manager in an insurance company, Jhansi-based Deepesh Kumar advises people how to manage risk. But he himself jumped headlong into a Ponzi scheme by following his friend Vivek Gupta (see picture). The online survey by economictimes.com reveals that one in every five respondents is willing to put money in such multi-level marketing schemes. if you think ignorance is bliss when it comes to your investments DO YOU KNOW the features of your insurance policy? Or the investment mandate of your mutual fund? Not many investors do. They just invest in any and every scheme that is suggested to them. Unscrupulous brokers take advantage of this low level of financial literacy. It allows them to sell high commissions but low-value products to investors.

The tax-planning season, which begins in January when companies ask employees to provide proof of tax-saving investments, is when mis-selling is at its peak. "Few investors look at what they are getting from the insurance product they are buying. All they want to do is save tax anyhow," says a chartered accountant who advises retail investors on tax-saving strategies. Vimal Gupta has bought a Ulip but insists that it is a mutual fund. "It is not an insurance plan because the risk cover comes free. My agent told me that the risk cover will continue even if I stop paying the premium," says the small businessman from Orai in Uttar Pradesh.

Retired lecturer Minoti Chakravarty-Kaul is a well known name in development economics. But she too was conned into buying a pension plan by the same advisor who mis-sold the scheme to her former colleague Chandrakanta Makhija. "He knew my investment in RBI tax-free bonds was maturing soon and suggested that I buy a pension policy which would mature in three years and give a return of 30%," she says. It was actually an insurance policy which covered only her children.

Insurance companies are flooded with complaints from investors who are miffed at the high charges deducted on their Ulip policies and the surrender charges levied when they want to withdraw after the lockin period. "I was assured that I can foreclose the child plan after three years. But when I ended the policy because of other financial commitments in 2010, the company gave me only 40% of what I had paid," says Bangalore-based Bharti Kumar. Their mistake: They did not do their homework or spend time studying the features of the products before signing on the dotted line. But their losses are too small compared to what Kulbhushan Suri and his wife Dr Vinod Suri suffered last year (see picture). It's not surprising that high-net worth investors such as the Suris did not go to a professional financial planner but relied on the "free" advice given by the broker. Nearly 30% of the respondents in the economictimes.comsurvey believe that there is no point in paying for financial advice when you can get it free.

if you believe your money will double in two years FEAR AND GREED are the two most uncontrollable things in financial markets. It was fear of losses that made retired Delhi University lecturer Chandrakanta Makhija steer clear of stocks and invest a big chunk of her retiral corpus in the fixed income Senior Citizen's Savings Scheme in 2005. But it was greed that made her break the deposit two years later and invest the entire 15 lakh in a scheme that an insurance agent said would double her money in two years. "He even gave me an affidavit on a stamp paper assuring me the returns," she says. What he didn't tell her was that the scheme was a pension plan which would put her money in stocks. He also didn't tell her about the 15% that would get deducted in the first year as allocation charges. One year later, in October 2008, the value of her investment had come down by more than 50% due to the market crash.

As a veteran investor, Makhija should have known that no investment option can offer such high returns. Besides, market-linked schemes don't offer assured returns, so the affidavit she is holding is just waste paper. Makhija's folly pales in comparison to what S Thungo of Imphal did with his money. He invested 50,000 in a scheme from Quantum Funds Online (no link with the Quantum Mutual Fund) in February 2009 because it had promised to pay him 30% ( 15,000) every month for the next three years. The money was handed over in cash to a representative of the "Cayman Island-based" Quantum Funds Online who came from Kolkata. No payment came to Thungo. The representative never called back and the phone number is no longer functional. As they say, a fool and his money are soon parted. if you think an insurance policy should give you returns IF YOU NEED life insurance, there's nothing like a low-cost term plan. And if you want returns, choose any option ranging from lowrisk fixed deposits to high-risk mutual funds. Yet, Ulips, which bundle investment and insurance into one but levy high charges in the initial years, are sold more than pure insurance term plans. "Very few people buy term plans because most people think it's a waste of money if they are not getting returns," says Hyderabad-based insurance adviser Suri Seeta Ram. That is why agents find it easier to sell life insurance as a three-in-one combo that gives good returns, saves tax and also provides life cover.

If you don't get taken in by the triple benefit, agents add a fourth dimension and sweeten the deal with "cash incentives". If your agent is offering you kickbacks, it's a sureshot sign that he is selling you a lemon. Nashik-based Rajendra Sonawane, who is himself an insurance agent, should have known this. His wife Sangita bought a Ulip from an agent who not only promised high returns but offered 20% cash incentive in the first year. "She told my wife that since 2010 was the silver jubilee year of the parent company, there were lots of benefits being rolled out for investors," says Sonawane. "At that time, it seemed like a good offer," he adds sheepishly. Four months on, the 6,000 promised to Sangita on her investment of 30,000 has still not reached her. "When I called her, the agent said she had send the cheque to me and even gave the cheque details. After that, she has been evading my calls," she says.

The agent had also promised Sangita that if she was not satisfied with the policy, she could return it within 90 days of receiving it. Insurance Regulation and Development Authority has directed insurance companies to offer buyers a 15-day free-look window within which they can return a policy. No company has extended this offer to three months. It's surprising that Sonawane was not able to see through the lies even though he is from the same industry. All he was concerned about was the "cash incentive" they were promised. As our survey shows, an overwhelming 61% of the respondents say agents should give kickbacks. And 28% feel that term policies are a waste of money.

Source: http://epaper.timesofindia.com/