Execution-only trading apps surge in India: Here's how you can steer clear of frauds and pitfalls

Panic gripped 38-year-old Delhi-based investor Sandeep Sethi as he frantically switched from his usual investment app to CAMS and MFCentral to verify his mutual fund (MF) holdings. His nervousness was fuelled by the recent uproar over the alleged inaccessibility of funds invested through the popular execution-only platform (EOP) Groww, which sent shockwaves through the investor community.

In June 2024, a post on X went viral, alleging financial fraud committed by Groww. The post said the user’s money had been deducted but not invested in MFs, like it was supposed to have been. At 50 million, Groww is the most-downloaded EOP, and Sethi’s hysteria was understandable. But Groww issued a clarification, saying it “found that the customer’s account was showing an incorrect investment due to a [reconciliation] issue” and that it “deeply regrets the reporting error”.

Despite the clarification, many investors who use EOPs—platforms that only execute trades and do not provide any investment advice—have turned cautious now and are looking at consolidated account statements (CAS) to check their investments or are requesting consolidated statements from their service providers. However, many cannot see all of their investments because several funds have different registrars and transfer agents, or RTAs.

The Groww incident alerted investors to the potential vulnerabilities of EOPs. As a result, their confidence in such platforms is shaken.

WHAT AILS EOPs?

Many investors have racked their brains with one question after that incident: how could it occur? EOPs such as Groww, MFCentral, Zerodha Coin, Kuvera, etc., rely heavily on technology. So, there’s a potential risk of technical glitches that could impact one’s ability to access funds or execute trades. The high number of investors, which is only increasing every day, and the high volumes of transactions strain these systems, making technical glitches more likely.

But it is also critical for investors to exercise caution and keep their eye on investments. Mohit Gang, CEO and Co-founder of investment platform Moneyfront, says, “A few years ago, there was no concept of direct transfer of funds to asset management companies (AMCs) for purchasing MFs.” Some platforms used to collect money in their pool accounts and then match orders with payments at the end of the day. In such cases, Gang says, it was possible for funds to miss out on payments. “However, this practice has stopped, and funds are now transferred directly to AMCs via the exchange mechanism.”

Caution is also warranted because India’s start-up landscape is very dynamic and funding rounds have been fast. So identifying genuine apps has become trickier. One may not understand which app is good and will serve them well in the long term.

Besides, data breaches at investing apps can potentially expose personal details like names, addresses, accounts, PAN, and Aadhaar. That information is gold for identity thieves who can use it to open accounts in your name, rack up debt, or even obtain fraudulent loans. Recovering from identity theft can be frustrating.

Like other web-based platforms, EOPs are susceptible to cyberattacks, too. If your EOP login credentials or account details are exposed, hackers might attempt unauthorised transactions or even try to drain funds.

Apart from cyberattacks, Renu Maheshwari, a registered investment advisor and Co-founder of investment advisory firm Finscholarz, says, “Another real worry is gamification [of the apps] and getting into the wrong products. The proliferation of derivatives trading amongst youngsters is one such issue.”

TREAD WITH CAUTION

When picking an EOP, it is important for investors to consider this question: does the app prioritise certain investment options or incentivise frequent trading through features like gamification? How can one ensure one is making an informed decision and not getting influenced by the app’s design? “All online apps are designed to be addictive. This behaviour is dangerous, especially for youngsters,” says Maheshwari.

The investment advisor adds that even though these apps are good tools to bring capital markets to one’s fingertips, they can induce financially dangerous behaviour. “Investor behaviour can be as dangerous as the underlying product,” she says. Maheshwari highlights the recent increase in derivative trades by retail investors. Of course, derivatives are a good hedge but could turn out to be a problem, she says. “A good understanding of all the products is a good place to start. If that is not possible, then one should act under the guidance of a fiduciary advisor.”

However, Parth Nyati, Founder of stock trading platform Tradingo, has a different viewpoint on gamification. He says all platforms have to go through a functionality approval process from stock exchanges. “No broker can launch any platform without this approval process. Any kind of gamification is not allowed. The apps showcase market data, and some apps also give recommendations. However, it is the investor’s choice to decide where to invest.”

FRAMEWORK for EOPs

Aware of the growing challenges that the increase in trading, especially through apps, has thrown up, markets regulator Securities and Exchange Board of India (Sebi) has attempted to set down some rules. In June 2023, it introduced a framework for EOPs to protect investors, promote industry growth and competition, and regulate costs. Gang of Moneyfront believes that even though Sebi oversees everything on a daily basis, EOPs are now regulated by the stock exchanges through self-regulatory organisations (SROs) like the BSE Administration and Supervision Limited (BASL).

Amol Joshi, Founder of Amfi-registered MF distributor Plan Rupee, says, “MFs’ units are not the apps’ assets. Units belong only to investors and are allotted or debited (during purchase and redemption by RTAs of MFs). Such RTAs are regulated by Sebi, and fees are specified by Amfi.”

So how do these apps charge investors? Most of them provide direct MF plans and aren’t allowed to take any commission from fund houses. Additionally, Sebi has categorised EOPs into two groups: EOP1 and EOP2.

According to Sebi, EOP1 apps will act as mutual fund agents and integrate their systems with AMCs and/or RTAs authorised by such AMCs. EOP2 apps will act as stockbrokers and will need to get registered as stockbrokers under the EOP segment of exchanges.

Unfortunately, many investment apps don’t advertise their EOP category publicly. To remove confusion among investors, regulators should ask apps to mention their category—EOP1 or EOP2—upfront.

“If they work as EOP1, they are entitled to get a tiny charge of Rs 1-2 per transaction from AMCs. If they work as EOP2, then these platforms can charge clients a fee for facilitating direct plan execution,” says Gang. Adding to that, Joshi says the EOP2 category is permitted only to charge on-boarding fees and a flat transaction fee. There are no hidden fees or commissions.

LESSONS TO LEARN

Selecting an investment app goes beyond just picking a user-friendly interface. The classification under the EOP framework can impact returns. While one needs to be aware of gamification, one should also remember that these apps allow one to just transact in direct MF plans without offering investment advice.

The EOP categorisation helps understand potential fee structures, but it’s not the only factor investors should consider. They shouldn’t solely rely on the EOP apps to track their entire MF portfolio. They should essentially request monthly CAS reports.

A CAS report, sent every month by CAMS or the National Securities Depository Ltd on a registered email address, offers an overview of investments.

By understanding EOP categories and utilising CAS reports, one can navigate investment apps with greater confidence.

You must also select an app with a strong record of cybersecurity. Look for information on their security measures. Phishing emails or websites can try to trick you into revealing your login credentials for the EOP. Be cautious of suspicious emails and only access your EOP account through the official website.

“We are continuously audited by a CERT-in-empanelled cybersecurity auditor who has also given us a certification, in line with Sebi guidelines. Investors should stay away from entities that are not Sebi-registered stock brokers,” says Nyati.

However, Maheshwari says, “Data breaches and account hacking are a reality. The apps are reasonably secure, but precautions are the user’s responsibility.” She adds that it’s up to investors to not share passwords, to create strong passwords, change them regularly, keep an eye on transactions, report any suspicious activity, and keep separate accounts with limited funds for this activity, and not use public networks for transactions.

It’s crucial for you to conduct your own research and ensure that these platforms are regulated.

Nyati says all entities are required to send daily transactions to the respective investor on a registered email address. “Investors should always check their transaction statements,” says Nyati. As the investing scenario burgeons in the country, it is important to not get dissuaded by the vagaries of the apps. By maintaining a healthy dose of caution, one can use EOPs to build their portfolio without much apprehension.

@imNavneetDubey