Now a day every media source is talking about SEBI’s crackdown on Pearl Agrotech Corporation Ltd. (known as PACL). SEBI has ordered that PACL did not register its investment scheme with it and therefore this investment scheme is illegal. SEBI has asked PACL to return to investors, the money it has raised from them. Until now, it seems like the story of an errant company, which raised money without going through official procedures. However, one is shocked when one gets to know the amount of money, which PACL has raised, and the number of investors it claims to have. PACL has raised about Rs. 50,000 Cr. from about 5 cr. investors!
PACL had promised guaranteed returns to its investors by launching a land investment scheme. Investors could deposit the money in installments or as a lump sum. Apparently, PACL used this money to buy agricultural land and promised its investors a fixed return or a parcel of land. However, most investor got neither the money nor the land. SEBI called about 500 investors randomly. Not even one of them had received the promised land parcel.
It seems that the scheme was being run like a collective investment scheme or multilevel marketing (MLM) scheme where money received from new members is used to payoff old members. Such schemes run smooth until the company keeps getting new members/investors. However, once inflow of new members stop or any regulator finds out about the scheme, the entire cycle stops and the members/investors get hurt. Most of them do not receive their principal money back leave apart the promised sky-high returns. The newest members loose the most.
Why Personal Finance Education is Necessary?
I used to believe that such companies would be able to lure naïve and illiterate people staying in far-flung villages, who are outside the financial inclusion circle. Such companies would be promising them sky-high returns and then running away with their money. I thought that educated people whether in urban or rural area would be smart enough to understand the trap of such companies and stay away from them. However, even a cursory look at the number of people duped by PACL: 5 CRORE investors, would tell you that it is not limited to naïve-illiterate villagers. People from all walks of life and every socioeconomic status are part of it.
Take a look at the number of frauds unearthed recently: National Spot Exchange Ltd. (NSEL), Saradha, Speak Asia or Stock Guru. People telling their grievous stories on news channels do not seem illiterate. They are well-educated urban citizens staying mostly in metro cities. How can they fall for such traps? Is it just greed or the lack of proper financial education?
I believe it is a mix of both. Greed when combined with financial illiteracy, gives rise to unrealistic expectations of returns on investments. People forget that there are only a few investment asset categories and each asset category has its range of possible returns.
Debt asset category, which includes Bank FD, post office schemes, company deposits, liquid mutual funds, PPF etc. can give returns in range of 8-12%. Equity, which includes stocks and equity mutual funds can provide returns of about 15%. Real estate can give returns of about 15%. Return expectations from Gold and alternative assets like art, private equity, hedge funds etc. are also about 10 – 15%. Most of the investment managers who invests money by legal means are going to earn returns within these ranges. Exceptional performances in equity, real estate and alternate assets are possible due to a combination of extreme hard work and luck. Returns higher than these are earned only by successful entrepreneurs in their own ventures. Anyone who promises higher returns without satisfactory business plan should have raised suspicion at least to urban literate people. However, it was not so. Literate or illiterate, urban or rural, everyone got carried away by greed and burnt his fingers. Many lost their lifetime savings.
Why the Education System Needs to Share the Responsibility
I believe that our education system is partly responsible for it. College education has been modeled to provide individuals the skills with which they can go out in the world, work for themselves or others and be productive to the society. It is almost certain that if one were productive to society, he/she would be paid in money. The moment one gets money, everyone be it salesperson or scamster, start approaching him/her with various investment schemes. She is flooded with seemingly very promising investment options of insurance, ULIPs (Unit Linked Insurance Plans), demat accounts, mutual funds, portfolio management, MLMs, land investment schemes, residential apartments, commercial properties and what not! Most salesperson are looking at their commissions but a few look forward to outright duping her and running away with her entire money.
Unless one has a financially astute family background, he/she is completely ill equipped to take financial decisions. Salesperson shows her dreams of becoming millionaire/billionaire in a short time and she falls for it. She hands over her hard-earned money with much expectations of seeing it multiply only to come to know later that her investments have either suffered losses or worse, she would have to run pillar to post to get it back. She would be lucky if she were to get any part of it back at all.
I always wonder if college administration knows with certainty that its students inevitably are going to earn money on completing their education, why cannot it make personal finance a compulsory subject for every student, irrespective of him/her studying medicine, engineering, science, commerce or arts. Such a course would be of immense help to students throughout life.
It is often said that earning money is easy. Managing and investing it is difficult. No wonder we keep on working very hard focusing only on earning money whereas many sinister perpetrators keep on duping us easily. Its a huge loss to any person. Think of it from a different angle: if you save Rs. 2 lakh in a year for your retirement and someone dupes you of Rs. 2 lakh, effectively he has duped you of one year of your life because now you would have to work for one extra year to have same level of life after retirement.
I strongly believe that every college, irrespective of its specialization, should provide personal finance education to its students. It is a very important aspect of one’s learning, which is missing in our educational system. Moreover, looking at the increasing number of investment frauds and financial mis-sellings, I think it is high time that we as students start asking for personal finance courses in our colleges.
Addendum: June 30, 2021
It seems that the govt. has recognized the need for creating financial awareness in students before they join the workforce. Today, I read that the Central Board of School Education (CBSE) has tied up with the National Payments Corporation of India (NPCI) to introduce a financial literacy course for school children.
The course is supposed to start from Class VI and would include basic financial concepts. We are happy that the need for giving financial education to students during their education phase is now recognized.
What do you believe about the level of financial awareness in our colleges? Do you think financial education would be helpful to you as a college student? Let us know in the comments.
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