INVESTMENT FRAUD

AGILITY OF MUTUAL FUNDS IN SHIELDING RETAIL INVESTMENT

TARIQ AHMED SAEEDI - tariqsaeedi@hotmail.com
Mar 17 - 23, 2008

As part of its investor awareness programme Security and Exchange Commission of Pakistan (SECP) as well as stock exchanges have been propagating public warnings related to fraudulent investment seekers nationwide generally through print media for last few years. The programme is aimed at educating investors in securities market about fraudulent brokers, who are not registered with the SECP and could therefore embezzle public money. While last year only two unscrupulous brokers were detected by the SECP, one of which belonged to Karachi, the effective and vigilant mechanism to dig out illegitimate fleecing of investors has not been designed so far. Adopting a common modus operandi, these unscrupulous brokers team up investment in a close knitted group; typically what was ascertained in Karachi, where illegal brokerage house was brought into operation with the assistance of 15 to 20 mate-stock investors. Finally SECP put the operation on blacklist, said Hizbullah Siddiqui, Director Securities Market, SECP. Likewise, another such business was notified for its unregistered and hence illegal status by the authority. He said investors with little sense of stock trading or poor access to information are usually entrapped. Along with, they get into such trap anticipating marginal profits on investment. When asked: are mutual funds more susceptible to fall prey to these malefactors? He replied not necessarily.

While talking to this scribe on telephone, Hizbullah Siddiqui said, "I am not aware of any brokerage house involved in seeking individual or corporate investments without approbation of SECP across the country. Otherwise, I would have hit it down." He said stock exchanges are told to disseminate investors' awareness messages routinely. No schedule has been fixed to stop the campaign. "This exercise will continue for years." It is said that mutual funds are less risky in terms of financial fraud because of various reasons.

PORTFOLIOS DIVERSIFICATION

First of all, the offerings are made out of well known and equally well recognized asset management companies in contrast to brokers whose credibility is not publicly identified. Secondly, mutual funds are the pooled investments in diversified marketable securities such as short term debt instruments and shares. Diversification in portfolios provides hedging to individual investors as the portfolio is managed by the expert fund manager and plunging to a major loss of investment sub sides owing to dexterity of funding decision. Not bringing monetary skills of other stocks middlemen into question, the point is to highlight adjoining speciality of mutual funds in shielding stock investment against prospective financial loss. Certainly, the rate of return on deposited amount whether in mutual funds or actively in other listed securities is comparatively high and has benefits for investor over certificate of deposits or other saving instruments. Innately the interoperability significance of mutual funds mitigate vulnerability of financial jitter parted into numbers unlike active or inactive shares trading in which stakeholder heavily sustains capital gain or bears capital loss because of maintaining homogeneous or less diversified portfolios. It is obvious that portfolios can only be expanded by punters who make positions in big lots, which need heavy investment. On the contrary, small investors can also strengthen their positions in spite of propositioning odd lots in mutual funds. The units holding spread out the profits and loss to outnumbered securities that equate rate of return somehow at par with the other certificate of deposits. Undoubtedly, the common shareholding or substitute active trading increases the exposure of dividends and difference at book values. Besides, SECP authorizes privileged license to fund manager dealing in open and close ended funds and without its permission mutual fund companies and brokerage houses can not target public money for investing in capital market. Moreover, only assets management companies are authorized to manage mutual funds. While there are in Pakistan many brokerage houses operating, the number of assets management companies is roughly around twenty seven. And, thus verifying authenticity of mutual fund business would not stand an uphill task for the aspired retail investors, who at most suffer due to lack of awareness.

WEEDING OUT CAPITAL MARKET ABUSE

Although the investor awareness programmes guide money depositors in securities market about how to reduce probability of being entangled in deceiving racket, no other considerable institutional measures have been taken up to secure investments. Such as opening of sub account with the CDC is foremost recommended to shareholders. The online trading to a larger extent has eased the process of account verification. The relegation of clearing works from CDC to a separate organization has instilled propelling effect in verifying shareholding identity. But there is still fear of funds mismanagement hovering around capital market. Factually, public warnings can merely acquaint of funds misuse while institutional measures should be in place to weed any possible abuse out of capital market. Or, this must be conceded that regulatory bodies are deficient in and incapable of control over embezzlers. In past, fraud case rendering billions of loss to shareholders in Karachi Stock Exchange was probed in but the findings have not been made public so far. The hidden finding about the fraud not only shattered the confidence of public but also shed doubts on motives of finders. This also substantiated the idea that if influential, embezzlers of public money can go scot-free.

Apparently, mutual funds get less attraction for investors seeking overnight profits, yet they ensure sustainability of returns and befit with the density of the retail investment. Also, corporation outlays find safe refuge in mutual funds for they would be reseeded into business process and reinvested in organizational non-development prerequisites like pension and provident funds. Over and above that, no case of fraud has appeared in mutual funds market. Recently, the interest of individual as well corporations in mutual funds keep on increasing for the disengaged association with the stock market. Because of, open ended and close ended funds entitle particular fund managers to take stock trading decisions on behalf of share holders and share certain percentage of profits with the unit holders. In Pakistan, the mutual fund market is on introduction stage and with growing awareness in public and network outreach the capital market would flourish further.