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Opinion | Two nudges regulators can use to drive right financial decisions

When investing in a fixed-income instrument, don’t just go by the interest ratesPremium
When investing in a fixed-income instrument, don’t just go by the interest rates

  • Financial instruments for investing in India include small savings schemes, NPS, insurance products, MFs, stocks, chit funds, gold schemes, physical gold, FDs. Each have different documentation, risks and disclosures, and for most investors, it is challenging to study the minute details

As we end a tumultuous 2020, with hopes of the covid-19 vaccine driving almost all asset classes to their peak, the need for nudges to take better financial decisions stands out even more.

Three areas where investors lack the right awareness are - digital transactions, investing, and borrowing.

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A simple and easy way to bring about this awareness can be through standardising documents and having pop-ups along with social responsibility built into product labelling.

At present, financial instruments for investing in India include small savings schemes, National Pension System (NPS), insurance products, mutual funds, stocks, chit funds, gold schemes, physical gold and fixed deposits. Each of these have different documentation, risks and disclosures, and most investors find it challenging to study the minute details. Moreover, they may be guided by agents to believe that a product is giving fixed and great returns, as is the case with insurance agents.

I routinely receive queries regarding pension schemes or capital guaranteed insurance plans. The XIRR (internal rate of return) on these plans is 4-5% but investors are sold these policies promising 8% return. With the falling interest rates, investors are opting for smaller banks, non-convertible debentures (NCDs) and company deposits for higher returns without being aware of the additional risks.

Trends will go out of fashion, but trend-chasing won’t. 2020 was the year of thematic investing with gold, international investing and ESG & healthcare being chosen by investors, more often to make a quick buck in the shortest period. Buying gold from e-commerce companies has become popular but there is no regulatory oversight on the product and even the holdings are audited by digital gold providers themselves.

Over the last few months, cryptocurrency trading has picked up significantly, driven by the performance of bitcoins. Bitcoins are not recognised by the Reserve Bank of India (RBI) and neither are there any norms regarding trading, settlement or a guarantee fund. But bitcoin trading volumes have grown by more than 500%, since March, according to data from some platforms.

Small-ticket loans too have grown five times in two years, according to CRIF, and one hears numerous stories of harassment by fintechs firms, leading to even suicide. Many of these loan apps which disburse loans to people with low credit scores, in minutes, are not regulated. These loan apps get access to phone contacts and call family members and friends to reclaim their money. Digital frauds too are rampant with the increased usage of digital payments. Senior citizens are easy targets of these frauds.

Two nudges by the regulators, can help individuals take better financial decisions:

-- Standardizing all applications with important risk information: Every application for an financial investment, whether it is a mutual fund or insurance plan or NPS or a chit fund or digital gold should have two things in bold - the name of the regulator for the scheme and the risk level (similar to the mutual fund riskometer). If a scheme is not regulated, like digital gold or cryptocurrency, it needs to be clearly mentioned. Further, this should be signed by the investor. For online applications, this can come as a pop-up to be accepted by the investor before proceeding to invest.

There will be cases where investors sign these forms blindly and they will bear the consequences. There is a limit to how much the regulator can do.

For loans too, a similar pop-up with details of the regulator and, most importantly, the interest rate stated in percentage terms should be mentioned. For digital loan apps, details of the information which will be taken from the applicant’s phone also need to be stated, so that the applicant knows the level of risk involved.

-- Mass awareness campaigns: Individuals need to be aware that such information is present on applications, so that they can easily figure out financial instruments, which are not regulated. The use of celebrities and popular shows like Kaun Banega Crorepati to promote messages on digital fraud is laudable and should be continued to alert the public about the perils of some products like insta loans or bitcoins or gold savings schemes from jewellers.

Like cigarette companies have the social responsibly of warning people against smoking, financial companies need to have socially responsible messages. For example, loan providers should have a message to borrowers about the effect of borrowing on the application form. Similarly, insurance companies need to state that insurance is meant for covering risk.

Hopefully, the continuous focus on risk information along with mass awareness campaigns will drive home the point. And citizens would be able to assess risks involved while investing or borrowing.

(Mrin Agarwal is financial educator, founder director, Finsafe India Pvt. Ltd, and co-founder, Womantra.)

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