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| Identify the tell-tale signs |
| Tinesh Bhasin / Mumbai Sep 05, 2010, 00:31 IST |
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Sellers of financial products have A tendency to confuse you with a maze of numbers. Here’s How.
A financial agent, armed with numbers, can be dangerous. As Kapil Mahajan discovered… Just a few months after signing up with a wealth management firm, he received an outstanding bill of over Rs 2 lakh.
Mahajan called up the ‘trusted executive’, who had promised him the moon by dangling returns of 2-3 per cent per month in front of him. The man simply said the ‘risk factors’ were outlined in the agreement.
A little more research and Mahajan realised that his money had been invested in the futures and options segment. He thought of legal recourse. But the agreement was full of fine print that allowed protection to the wealth management company.
“There is little one can do once the losses have been booked. Investors need to understand, any product that promises fantastic returns will have a risk element,” said Mahajan.
Here are pitches from agents for popular products and things you should look out for:
Direct stock investment: The most common pitch of executives from a brokerage house or their wealth management division is talking about historical returns of the stock market. Between August 1, 2005 and August 1, 2010, the market has returned 18.71 per cent annually. This means for every Rs 100 that you had invested, there was the potential of earning Rs 135.
The agent may also show returns of various stocks over the years and tell you tales of many investors becoming millionaires by investing in stocks such as Infosys Technologies.
Brokerage houses with portfolio management services (PMS) go a step further. They would compare returns from their product with Sensex or Nifty and tell you how their product has outperformed the indices.
Watch out: Equities have proven to be the best asset class compared to any other investment avenue. However, if you want markets to reward you, the only way is to invest small sums over a long tenure. “Over time, trading has only proved to be a zero sum game,” said a certified financial planner.
There are numerous cases where company executives or sub-brokers have lost money while trading on the client’s behalf. The portfolio is churned to generate the targeted brokerage. The market regulator too has noticed this and has been putting norms in place to curb such trades since last year.
Experts also say that many PMS product brochures selectively choose periods only where the fund has outperformed the indices. “Also, knowing performance of these funds in different market scenarios is not possible, as they don’t publish regular data,” said Hemant Rustagi, CEO, Wiseinvest Advisors.
Rustagi suggests that if a person wants to take equity exposure, the best route is mutual funds as they are simple, well regulated, transparent, and you can avail information on these easily.
Insurance: This is probably the most mis-sold product, as it has a complex cost structure or investment methodology. The Insurance Regulatory and Development Authority (Irda) has taken many steps to improve the offering. Experts feel that this will lower mis-selling of the product but not stop it completely.
The agent would still lure you into buying new policies every year between December and March, when the salaried start their tax planning. Reason: They would get slightly higher commissions in the first three years than the remaining tenure of the policy.An agent also pointed that the commissions on traditional products continue to be as high as 30 per cent.
Watch out: Avoid getting into new insurance products, especially if it is a part of the last minute tax planning. Financial planners feel that you are better off investing in an equity-linked savings scheme or even public provident fund.
The insurers keep coming up with innovative products that may look attractive. Don’t invest in them unless you know how they work. An insurance plan that guarantees highest net asset value (NAV) of the investment is one such example. Agents continue to mis-sell the product by not mentioning that this product predominantly invests in debt and the returns would not be as high as a product that largely invests in equities.
Avoid pitches from LIC agents, who try to sell products by saying that it is a government-backed company. Even government companies, such as UTI have lost money in the past. Also, don’t let your agent fill up the application form. He/she might fill incorrect details about your health. This could lead to problems while making the claim.
Mutual funds: After the ban of entry load, the possibility to mis-sell has diminished, except in case of new products or tax saving funds.
Agents get a higher commission during new fund offering and also in case of equity-linked savings scheme.
Watch out: Monitoring your mutual fund investment is simple. So, don’t change unless the fund has not performed well consistently for at least three-four quarters. Avoid NFOs as these funds do not have a proven track record.
“Do not invest in a product on the basis of returns it offers. Analyse where it fits into your overall portfolio. Also, understand the risk involved before investing in it,” said Malhar Majumder, a certified financial planner.
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