Management of Financial Institutions

Mutual Funds:Internet Fraud, The Pyramid Scheme, How to Avoid Investment Fraud

<< Mutual Funds:Cost of Ownership, Redemption Fee, Reports to Shareholders
Mutual Funds:Investing In International Mutual Funds, How to Pre-Select a Mutual Fund >>
Management of Financial Institutions - MGT 604
Lecture # 26
Mutual Funds
Navigating the Investing Frontier: Where the Frauds Are
Many fraudsters rely on the telephone to carry out their investment scams. Using a
technique known as cold calling (so-called because a caller telephones a person with whom
they have not had previous contact), these fraudsters will hound you to buy stocks in small,
unknown companies that are highly risky or, sometimes, part of a scam. In recent years, the
Internet has also become increasingly attractive to fraudsters because it allows an individual
or company to communicate with a large audience without spending a lot of time, effort, or
You should be skeptical of any offers you learn about from a cold caller or through the
Internet. Here's what you need to know about cold calling and Internet fraud.
Cold calling
For many businesses, including securities firms, cold calling serve as a legitimate way to
reach potential customers. Honest brokers use cold calling to find clients for the long term.
They ask questions to understand your financial situation and investment goals before
recommending that you buy anything.
Dishonest brokers use cold calling to find "quick hits." Some set up "boiler rooms" where
high-pressure salespeople use banks of telephones to call as many potential investors as
possible. Aggressive cold callers speak from persuasive scripts that include retorts for your
every objection. As long as you stay on the phone, they'll keep trying to sell. And they won't
let you get a word in edgewise.Our advice is to avoid making any direct investments over
the phone.
Internet Fraud
The Internet serves as an excellent tool for investors, allowing them to easily and
inexpensively research investment opportunities. But the Internet is also an excellent tool
for fraudsters. That's why you should always think twice before you invest your money in
any opportunity
you learn about through the Internet Anyone can reach tens of thousands of people by
building an Internet Web site, posting a message on an online message board, entering a
discussion in a live "chat" room, or sending mass e-mails. It's easy for fraudsters to make
their messages look real and credible. But it's nearly impossible for investors to tell the
difference between fact and fiction.
Types of Investment Fraud
The types of investment fraud seen online mirror the frauds perpetrated over the phone or
through the mail. Here are the most common investment schemes and the "red flags" you
should watch for:
Management of Financial Institutions - MGT 604
The "PUMP and DUMP" rip-off
It's common to see messages posted on the Internet that urge readers to buy a stock quickly
or to sell before the price goes down. Cold callers often call using the same sort of pitch.
Often the promoters will claim to have "inside" information about an impending
development or an "infallible" combination of economic and stock market data to pick
stocks. In reality, they may be insiders or paid promoters who stand to gain by selling their
shares after the stock price is pumped up by gullible investors. Once these fraudsters sell
their shares and stop hyping the stock, the price typically falls and investors lose their
money. Fraudsters frequently use this ploy with small, thinly traded companies because it's
easier to manipulate a stock when there's little or no information available about the
The Pyramid Scheme
In the classic "pyramid" scheme, participants attempt to make money solely by recruiting
new participants into the program. The hallmark of these schemes is the promise of sky-
high returns in a short period of time for doing nothing other than handing over your money
and getting others to do the same. Money coming in from new recruits is used to pay off
early stage investors. But eventually the pyramid will collapse. At some point, the schemes
get too big, the promoter cannot raise enough money from new investors to pay earlier
investors, and many people lose their money. Table 1 shows how pyramid schemes can
become impossible to sustain.
How to Avoid Investment Fraud
To invest wisely and avoid investment scams, research each investment opportunity
thoroughly and ask questions. Get the facts before you invest, and only invest money you
can afford to lose. You can avoid investment scams by asking-and getting answers to-these
three simple questions:
1. Is the investment registered?
Many investment scams involve unregistered securities. So you should always find out
whether the company has registered its securities with the SEC or your state securities
regulators. You can do this by checking the SECP's website database or by calling SECP.
Some smaller companies don't have to register their securities offerings with the SEC, so
always make background check and ask for referrals etc.
2. Is the person licensed and law-abiding?
Try and find out whether the person or firm selling the investment is properly licensed and
whether they've had run-ins with regulators or received serious complaints from investors.
This information may be difficult to get in Pakistan.
3. does the investment sound too good to be true?
If it does, it probably is. High-yield investments tend to involve extremely high risk. Never
invest in an opportunity that promises "guaranteed" or "risk-free" returns. Watch out for
claims of astronomical yields in a short period of time. Be skeptical of "offshore" or foreign
investments. And beware of exotic or unusual sounding investments. Make sure you fully
understand the investment before you part with your hard-earned money. Always ask for-
Management of Financial Institutions - MGT 604
and carefully read-the company's prospectus. You should also read the most recent reports
the company has filed with its regulators and pay attention to the company's financial
statements, particularly if they do not say they have been audited or certified by an
Mutual Funds - The Logic behind Investing in Them
Mutual funds are investment companies that pool money from investors at large and offer to
sell and buy back its shares on a continuous basis and use the capital thus raised to invest in
securities of different companies. This article helps you to know in depth on:
Is it possible to diversify investment if invested in mutual funds?
Find more on the working of mutual fund
Know more about the legal aspects in relation to the mutual funds
At the beginning of this millennium, mutual funds out numbered all the listed securities in
New York Stock Exchange. Mutual funds have an upper hand in terms of diversity and
liquidity at lower cost in comparison to bonds and stocks. The popularity of mutual funds
may be relatively new but not their origin which dates back to 18th century. Holland saw
the origination of mutual funds in 1774 as investment trusts before spreading to Anglo-
Saxon countries in its current form by 1868. We will discuss now as to what are mutual
funds before going on to seeing the advantages of mutual funds. Mutual funds are
investment companies that pool money from investors at large and offer to sell and buy
back its shares on a continuous basis and use the capital thus raised to invest in securities of
different companies. The stocks these mutual funds have are very fluid and are used for
buying or redeeming and/or selling shares at a net asset value. Mutual funds posses shares
of several companies and receive dividends in lieu of them and the earnings are distributed
among the share holders.
Are Mutual Funds Risk Free and what are the Advantages?
One must not forget the fundamentals of investment that no investment is insulated from
risk. Then it becomes interesting to answer why mutual funds are so popular. To begin with,
we can say mutual funds are relatively risk free in the way they invest and manage the
funds. The investment from the pool is well diversified across securities and shares from
various sectors. The fundamental understanding behind this is not all corporations and
sectors fail to perform at a time. And in the event of a security of a corporation or a whole
sector doing badly then the possible losses from that would be balanced by the returns from
other shares. This logic has seen the mutual funds to be perceived as risk free investments
in the market. Yes, this is not entirely untrue if one takes a look at performances of various
mutual funds. This relative freedom from risk is in addition to a couple of advantages
mutual funds carry with them. So, if you are a retail investor and planning an investment in
securities, you will certainly want to consider the advantages of investing in mutual funds.
Lowest per unit investment in almost all the cases
Your investment will be diversified
Your investment will be managed by professional money managers.
Management of Financial Institutions - MGT 604
There is no one method of classifying mutual funds risk free or advantageous. However we
can do the same by way of classifying mutual funds as per their functioning and the type of
funds they offer to investors. This Course makes you aware on:
What are the reasons that make the close ended mutual finds more attractive?
What are the factors that determine the prices of exchange traded funds?
Find out the features of open ended mutual funds
Table of Contents:
  1. Financial Environment & Role of Financial Institutions:FINANCIAL MARKETS &INSTITUTIONS
  2. FINANCIAL INSTITUTIONS:Non Banking Financial Companies
  3. CENTRAL BANK:Activities and responsibilities, Interest Rate Interventions
  4. POLICY INSTRUMENTS:Open Market Operations, Capital Requirements
  5. BALANCE OF TRADE:Balance of Payments Equilibrium, Public Policy and Financial Stability
  6. STATE BANK OF PAKISTAN:History, Regulation of Liquidity, Departments
  10. STATE BANK OF PAKISTAN - VARIOUS DEPARTMENTS (Contd.):Human Resources Department
  13. PAKISTAN ECONOMIC AID & DEBT:Macroeconomic Stability, Strengthening Institutions
  14. INCREASING FOREIGN DIRECT INVESTMENT:Industrial Sector, Managing the Debt
  15. ROLE OF COMMERCIAL BANKS:Services Typically Offered by Banks, Types of banks
  16. ROLE OF COMMERCIAL BANKS:Types of investment banks, The Management of the Banks
  17. ROLE OF COMMERCIAL BANKS:Public perceptions of banks, Capital adequacy, Liquidity
  19. ROLE OF COMMERCIAL BANKING:Private Deposit Insurance,
  20. BRANCH BANKING IN PAKISTAN:Remittances, Online Fund Transfer
  22. Mutual funds:Types of international mutual funds, Mutual funds vs. other investments
  23. Mutual Funds:Criticism of managed mutual funds, Money Market Fund
  24. Mutual Funds:Balanced Funds, Growth Funds, Specialized Funds, Measuring Risks
  25. Mutual Funds:Cost of Ownership, Redemption Fee, Reports to Shareholders
  26. Mutual Funds:Internet Fraud, The Pyramid Scheme, How to Avoid Investment Fraud
  27. Mutual Funds:Investing In International Mutual Funds, How to Pre-Select a Mutual Fund
  28. Role of Investment Banks:Recent evolution of the business, Possible conflicts of interest
  29. Letter of Credit:Elements of a Letter of Credit, Commercial Invoice, Tips for Exporters
  30. Letter of Credit and International Trade:Terminology, Risks in International Trade
  31. Foreign Exchange & Financial Institutions:Investment management firms, Exchange Traded Fund
  32. Foreign Exchange:Factors affecting currency trading, Economic conditions include
  33. Leasing Companies:Basic Purpose of Leasing, Technological Benefits
  34. The Leasing Sector in Pakistan and its Role in Capital Investment
  35. Role of Insurance Companies:Indemnification, Insurer’s business model
  36. Role of Insurance Companies:Life insurance and saving
  37. Role of financial Institutions in Agriculture Sector:What is “Revolving Credit Scheme”?
  38. Agriculture Sector and Financial Institutions of Pakistan:What is SMEs
  39. Can Government of Pakistan Lay a Pivotal Role in this Sector?:Business Environment
  40. Financial Crimes:Process of Money Laundering, Terrorist Financing
  41. DFIs & Risk Management:Managing Credit Risk, Managing Operational Risk
  42. Banking Fraud & Misleading Activities:Rogue Traders, Uninsured Deposits
  43. The Collapse of ENRON:Auditing Issues, Corporate Governance Issues, Corrective Actions
  44. Classic Financial Scandals:Corruption, Discovery, Black Wednesday