Column : Investor awareness needs to be heightened

Written by Saikat Neogi | Updated: Jul 29 2010, 02:29am hrs
At a time when the market regulator is working out various retail investor-friendly norms, the news of Rs 2 crore embezzlement committed by an employee of Jabalpur-based mutual fund distribution agency registered with the Association of Mutual Funds in India (Amfi), opens up a can of worms involving third party investments and the distribution business, especially in small towns.

The employee had forged documents filled by several investors, deposited cheques and cash in his own name and then redeemed the entire money within days. Though Amfi has suspended the registration of the company after the matter was reported, the issue that needs to be addressed now is how to keep a check on third party investments as more than 80% of various financial products like life insurance, mutual funds, postal savings and broking and portfolio management services are actually sold by independent distributors.

Although similar cases have been reported in the past, the magnitude of the embezzlement this time around is mind boggling and investors are left in a quandary. It is pertinent that fund houses focus more on customer education even as they try to increase sales by tapping distribution networks. Retail investors must be made aware that whenever they make a payment for any investment product, they must also sign the back of the cheque, mention the number imprinted on the investment document and the product details on the cheque. It is mandatory that these details be highlighted in the product document, which can be a good safeguard against embezzlement.

After the entry load ban on mutual funds last year, distributors are no longer finding it lucrative to sell mutual fund products. Fund houses will now have to look at alternative routes like online investments. This will reduce the paper work involved and investors will not have to wait for an agent to collect the form, give copies of KYC documents and write the cheque. Online investments can reduce loopholes, which are often exploited by distributors, as was done by the Jabalpur-based agency. As National Securities Depository Ltd has now enabled investors to hold mutual fund units in dematerialised form for demat account holders, fund houses must educate investors to convert their existing mutual fund units in dematerialised form and encourage new investors to take the online route.