Digital Investments: How You Can Protect Your Financial Interests Against Platform-based Risks

We are living in the era of digital investments, with only an app download, a few clicks, document uploads, and basic knowledge - almost anybody with a smartphone can start investing in stocks, mutual funds, bonds, and other securities. Given such ease, it is ever more important to be aware of ways you can protect your financial interests against platform-based risks. Recently, the investment platform Groww faced a social media backlash when a user alleged that the stock broker debited money from his account but no investment was made. Groww later clarified in a post that the customer’s account was showing an incorrect investment due to a recon issue.

Groww Investment Error: This is what happened

In a now-deleted social media post, a relative of the Groww investor in question said that In 2020 his sister had invested in Parag Parikh Mutual Fund the app. The user claimed his sister’s transaction was successful and she also received a folio number. The app reflected their current amount, growth, and other details on the dashboard. 

The error occurred when the customer decided to withdraw the amount but was unable to do so. When the user directly checked with Parag Parikh Mutual Fund customer care, they found that the fund never received their investment. As it happens, the folio number too did not exist.

The Groww company later said that the customer’s account showed an incorrect investment due to a recon issue, no investment was made, and that the money was never deducted from her bank account.

To temporarily calm the situation Groww credited the claimed investment amount to the investor and asked the user to remove the social media post which brought this issue to public notice. 

“To ensure that the investor doesn’t get anxious about the claimed amount, we have credited it to the investor on a good faith basis. We have also asked the investor to provide the bank statement evidencing the debit of the said amount, claimed to have been invested. This will facilitate our scrutiny, as well as that of our regulators, of the claimed investment in question,” Groww stated in a post on social media platform X.

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Be Aware While Doing Platform-based Investments

The Groww investment raises the question of how safe are your investments when made through third-party application-based brokers. “With the rise of numerous wealth tech and fintech firms, there is a risk that some fraudulent apps might have been created,” says Anand K Rathi, Co-founder of Mira Money. 

Adds Sharda Deepakraj Lala (CFA), Founder of Siddhantha Wealth Managers, “With the kind of technology that is easily available, there are a lot of fraudulent apps and websites floating in the market that dupe investors every now and then. Therefore, the most important aspect when choosing to use digital investment platforms is the credibility of its operator.”

How to ensure your investments are secure on such platforms?

“To ensure the legitimacy of the entity you are dealing with, verify that it is registered with SEBI, indicated by an RIA code, or with AMFI, indicated by an ARN code. Cross-check these codes and conduct a thorough background check to confirm the firm is genuine. You can verify the details by searching on Google, visiting AMFI's website or SEBI's website, and entering the firm's ARN or registration number,” Rathi explains.

The investors should also:

• Analyse the background of the firm's promoters and understand the nature of their registration. - Investigate their back-end partnerships, such as those with Razorpay or BuildDesk, and their clearing, R&D, registration, and transfer mechanisms. 

Are there any regulatory frameworks in place to protect your investments made via digital platforms?

Yes, there are regulatory frameworks in place to protect your investments whether on digital or physical platforms. 

“It is very clear that no investment is made in a third-party name. For instance, the investments get rejected if I invest in someone else's name. No AMCs accept your money even if you invest in your spouse's name. There are a lot of checks in place like that,” states Rathi.

Rathi further explains: There is a term called pull-in, which has stopped, meaning no platforms or dealing authorities can pull the money. When they get money from the investor, they have to immediately credit the AMC or start the credit from the money to the AMC. Nobody can hold the client's money. They also thoroughly conduct processes like redemptions, investments, name matches, and bank record checks. Various regulatory platforms and frameworks are already in place, so there's generally no need to worry about these aspects. 

Overall, investors need to verify that the digital platforms they use are legitimate. “This is important because SEBI has limited control over fraudulent digital platforms, making it essential for you to exercise caution,” Rathi cautions.

3. What due diligence should users perform before choosing an app-based investment platform and investing via the same? 

“The NSDL (National Securities Depository Limited) periodically sends investors the statements of their holdings. Furthermore, the investor too should demand statements from the Asset Management Companies (AMC) managing their mutual funds for cross-checking their investments,” states Sharda Deepakraj Lala (CFA).

Rathi highlights: When you invest, the digital platform will send you a confirmation. Additionally, AMCs handling your investment will also send confirmations, whether it's for a folio number or a DEMAT account. 

“You should receive confirmation of your investments within one working day. For example, if you invest 10,000 rupees in an ABC mutual fund, you should get the NAV allocation the same day or the next day, and the ABC mutual fund will email you a statement showing the 10,000 rupees along with a confirmation from your digital platform.”

This process also applies to buying ETFs. Rathi adds, “When you purchase ETFs on a brokerage platform, the units will be allotted and visible in your DEMAT account. CDSL or NSDL will also send you a monthly statement reflecting all these investments made via digital platforms. If these investments do not appear in the statements, then it's a red flag.”

Some essential tips to avoid encountering situations similar to the Groww incident

“While Groww clarified that the money was never debited and there were some transaction errors, what surprised me was the allegation that a Parag Parikh Mutual Fund statement confirmed the investment. This is completely false, as Parag Parikh Mutual Fund would not send a statement saying the units had been allocated if the investment had not been made,” states Rathi.

He further adds that if there is an issue, the money will be refunded and deposited back into an investor’s bank account. It won't get stuck with Groww or any other platform. For example, many investments have recently been rejected due to KYC issues like name mismatches or unvalidated KYC. 

“When an AMC rejects an investment, the money is credited back to the investor. If Groww's PPFAS investment faced such issues, the money should have been returned to the customer. Since the money was never debited, no confirmation was received, and the erroneous confirmation came from Groww, not PPFAS,” Rathi opines.

Here’s what you should do to protect your digital investments:

• Always ensure you receive a statement from the mutual fund confirming the investment 

• Check for an allocated folio number or that the units or ETFs are reflected in your DEMAT account

• Lastly, if the money is debited, you will get the units allotted. Check details.

“It always makes sense to do a transaction reconciliation with your app, digital platform, digital RM, etc. The industry is very strong in compliance and reporting. Still, by chance, if you face this kind of issue, it always makes sense to reconcile your transactions occasionally and match the investment,” Rathi comments.

“The complete story on this matter is still unfolding and is in the process of further development. So it will be a premature time to comment on this. It seems to be a matter of a technical glitch. Let’s wait and watch,” says Sharda Deepakraj Lala (CFA).