Financial Literacy: Beware of Bad Advice, Financial Frauds And Mis-selling of Investments

Managing your finances today is way more different than it was earlier, prior to the convergence of finance and technology. The rise of fintech has ushered in this remarkable upheaval and has significantly altered how we manage our finances!

The Fintech world has swiftly replaced almost everything done physically. Almost everything can now be done online, saving you time, money, and energy, including buying groceries, ordering ready-to-eat food, shopping, completing financial operations, making investments, and purchasing an insurance policy. Yet, the rapidly changing and innovative products employed by financial institutions nowadays represent a greater risk to your hard-earned money if you are not vigilant.

Financial scams and investment frauds have become common occurrences around us. A prime target is usually a potential investor who has money and is looking at several investment alternatives in the market. What if you were careless and put your money in the hands of someone who was planning to steal it without your knowledge? There have been numerous incidences of online scams, financial frauds, mis-selling, and other incidents that have caused people to part with their money and suffer some agonising damage as a consequence of their own negligence. To avoid this, it is critical to recognise red flags early and address them before paying a heavy price.

Having said that, the primary cause of many people falling victim to such financial pitfalls is a lack of financial literacy. The new financial year 2023-24 has commenced, beginning in April, which is also known as financial literacy month. If you lack financial knowledge or are financially unaware, now is a perfect time to review and improve your financial condition and skills.

Fraudsters are on the prowl and are progressively employing innovative techniques and methods of defrauding unsuspecting customers/investors. To ensure your financial well-being, you must safeguard your hard-earned wealth. Let us start the new financial year 2023-24 by understanding how to safeguard and sustain our financial well-being.

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These are some common financial problems that might arise right under your nose if you are not financially savvy and responsible with your money:

1. Financial Frauds

Financial fraud takes place when someone deprives you of your hard-earned money or otherwise harms your financial health by dishonest, deceitful, or unlawful methods. This can be accomplished through a variety of methods, including identity theft or investment fraud, in which someone steals your personal financial information, such as your account number, Adhaar number, Pan number, ATM pin, and so on, in order to make fraudulent withdrawals/investments from your account. Banking fraud complaints, particularly through digital methods, are on the rise. Financial fraudsters are extremely intelligent and agile criminals who use a variety of sophisticated and efficient deception strategies.

With the advancement in technology, cases of financial fraud are on the rise. The cases of financial fraud committed in cyberspace are no less daunting. Often, these frauds involve misuse or manipulation of public funds by the fraudsters to make huge profits for themselves.

Most individuals use the internet every day and become accustomed to the information that is presented to them. Checking emails, for example, is a routine behaviour that you undertake every day. Nevertheless, internet scams in your email may be lurking and going unnoticed. Several scammers take advantage of this and send bogus emails requiring us to download rigged attachments or follow any investing advise we may fall for.

2. Victim of Bad Advice

How often have you found yourselves wound up with the wrong advisor or accepting financial advice from someone unknown? As humans, you tend to get influenced easily, especially about subjects about which you have little to no knowledge. However, when it comes to personal finance, investments or tax or savings, we simply believe in the person we feel has achieved past success.

Some may advise you to invest in risk-free opportunities. This, however, cannot be true as long as we live in an uncertain world. Instead of being drawn into the false cloud of zero risk, make the best suitable selection for your expected returns and risk-taking capacity. Do not listen to bad advice since every investment carries some risk, therefore invest according to your needs.

Thus, do note that each individual has different goals, income sources, liabilities and, most importantly, distinct financial conditions. As a result, blindly adopting anyone's advice might be financially disastrous because what works for someone else may not work for you. Just as a doctor prescribes different treatments to different patients, even those with the same condition, financial advice should also be taken after consideration of your needs and condition - risk tolerance, financial goals and investment horizon.

3. Mis-selling of financial products

Mis-selling is when a seller misrepresents a product or a service to a buyer and lures them into buying it. The problem of mis-selling has been on a rapid increase in the financial markets, where financial advisors, agents, brokers, and policy sellers are following this practice for their own benefit. A retail investor may not always have enough financial knowledge to understand the risk-return trade-off of investing in Mutual Funds; they often consult advisors or agents. Whenever these advisors or agents sell a policy prioritising their gain instead of the benefit of the buyer, it is a situation of mis-selling.

Have you ever received cold calls from supposed representatives of various insurance or mutual fund companies enticing you to buy their products? Proceed with caution if this is the case. Several of these cold-callers create an emergency scenario and rush you into a decision without fully disclosing the risks associated with the transaction.

Furthermore, our friends and family are the most common source of such deceptive investment advice in our lives. They may come across an influencer or an investment agent who nudges them into investing in plans that sound too good to be true and may then approach you to invest in such a promising scheme. Also, there is mis-selling of investment schemes that offer you higher returns like the 'Ponzi Schemes.' It is an investment fraud that generates returns for earlier investors with money taken from later investors. In this type of fraud, the clients are promised huge profits with little to no risk.

You see, most of the Mis-buying occurs when customers/investors are entirely unaware of the financial product's details and complexities. Mis-selling can thus be prevented if you understand your needs, risk tolerance, and biases, comprehend the financial product, and are financially literate. Here are a few points that investors must practice to prevent falling into mis-selling traps:

• Avoid making impulsive financial/investment decisions

• Don't be greedy for high returns

• Do not panic due to high market volatility

• Ignorance is not bliss; learn about the market and financial products it offers

• Invest according to your financial needs and alignment towards your goals

To conclude...

Financial literacy is the key to a secure financial future since it allows you to take charge of your finances and protect yourself from the aforementioned complications. Financial literacy refers to the process by which financial consumers/investors improve their understanding of financial products, concepts, and risks and develop the skills and confidence to become more aware of financial risks and opportunities, to make informed choices, to know where to go for help, and to take other effective actions to improve their financial well-being.

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As you may comprehend financial concepts better, you will be able to ask appropriate questions to your financial advisor rather than relying solely on their judgements. Financial literacy enables you to take on the role of financial guardian for your family and support them in making sound financial decisions.

Thus, on this event of April Fool's today, be wise and prevent yourself from being a financial fool and misled by banks, credit card companies, and other financial entities. This is only possible if you are financially literate and better understand the nitty-gritty of financial planning to maintain your financial well-being.

MITALI DHOKE is a Research Analyst at PersonalFN. She is an MBA (Finance) and a post-graduate in commerce (M. Com). She focuses primarily on covering articles around mutual funds including NFOs, financial planning and fixed-income products. Mitali holds an overall experience of 4 years in the financial services industry.

She also actively contributes towards content creation for PersonalFN’s social media platforms in the endeavour to educate investors and enhance their financial knowledge.