Watch out for these gimmicks before investing

Don't get carried away by lofty promises and hard-to-believe sales pitches because there is more often than not a catch.

Recently my father received an SMS that read: "Invest in genuinely good public sector undertaking and receive guaranteed returns after three years in 36 post dated cheques."

The first thought to cross his mind was looks like a good offer; let me follow it up. On second thought it looked like a good sales spiel and he decided against it. Well I am not saying it was just a gimmick but most of the times when such leads are followed up or invested upon well the rest is understood.

Spin can be in any form starting from distortion of facts, mis-selling, or even in the form of excuses to fight bad advice or negligence.

The impact of these spins can be devastating since it's your hard money that is at stake. Due to such sales spin or marketing gimmicks spun by untrained sales people, your money gets stuck in bad investments.

How many of you can vouch that you have 100 per cent knowledge of all the investment decisions you have made?

Many investment decisions are either based on advice of friends or family members or from a seller who knows that if s/he tells you all the '*conditions that apply' her/his sale will not go through.

Illustration: Uttam Ghosh

The author is a certified financial planner and can be reached at dhanplanner@rediffmail.com

Let me start with an example: Gone are the days of guaranteed good returns. One can earn guaranteed returns only on government-backed debt products and that too does not cover all debt products.

Most investors look for guaranteed returns in their investments. Hence to cash in on this, many insurance companies came out with guaranteed return unit linked insurance plans (ULIPs) that lure many an investor towards it.  Selling agents have a field day (mis) selling these schemes where it is written in big bold letters GUARATEED RETURNS.

What they do not state is that these schemes have higher expense ratio than even the existing ULIP plans (which as per new rules have become even more expensive). Also, your premium amount is predominantly invested in debt funds.  And if the internal rate of return is calculated over a period of 20 years to 25 years which is generally the tenure of these schemes the returns are not more than 4 to 5 percent.

These schemes are targeted especially at individuals above 50 years (who are on look out of safe investments) who are in need of more health insurance than life insurance.

Illustration: Uttam Ghosh

Let me take an example of the stock markets. In recent times with the boom in stock markets, you will get calls or the ever-irritating sales SMS stating: "We give intra-day tips or such and such stocks or investments are ideal for investors who are willing to take a certain level of risk in order to reap huge benefits."

What they really are saying is, "this is a big gamble which we are not willing to take with our own money and hence we require investors with whose money we can take this risk."

Or calls from individuals who state that they do complete financial planning but what they really mean is that they just do investments and not the entire financial planning which comprises of everything right from budgeting to risk management to investment planning to retirement planning and finally estate planning or will planning.

The most hit by the recent ban on entry load were the bank relationship managers or investment advisors as a bank is a good place for walk-in referrals. I have clients who are approached by them and told to invest in a particular fund with the promise of high returns.  What they really are doing is getting you to invest in a particular fund since they have to achieve certain targets.

Well the list can go on

Illustration: Dominic Xavier

This is a standard post-sales gimmick. The most common problem that most of you might have faced especially when you have invested through an agent of the company is that after six months or a year the agent has changed the company and all promises made by her/him are rubbished by the company.

Take for example premium amounts of health insurance: Many a general insurance company raised their premium amounts of health insurance. What most of you do not know is that the company has the right to revise the premium amount every three years, which is generally not informed to you by the agent.

The standard excuse "Our document had stated all terms and conditions which you should have read," which one cannot even argue against at times because invariably no one wants to go through the tedious terms and conditions.

Or take example of investment in equities where you are told, 'You were aware of the risk associated with equity market". And they are right.

Well the denials are strong enough for an investor to not take any action but lick her/his wounds.

There is very thin line between the spins told to you and an outright lie. At times, it's difficult to distinguish this line. Hence the importance of being an informed investor's a must. You do not have to be a financial wizard to know all your investments. But a few basic checks can go a long way in reaping benefits from investments of your hard earned money.

Illustration: Uttam Ghosh

When it comes to equities, check things like:

• Basic performance of the sector and future of the sector
• Promoters of the company
• Basic research about the past track record on net profit made by the company
• Dividend history, which is also given on the Internet
• Quiz the person about the future of the company and why has s/he suggested this company

Before buying insurance make sure that you are not clubbing insurance and investments and ask yourself these questions:

• Do you really need this insurance
• What are the benefits?

For instance if you are buying health insurance then ask about no claim bonus, grace period, maximum term coverage, hospital network, co-payment if any, diseases covered, claim settlement and last but not the least how often has the company revised the premium amount.

If you are young and buying life insurance then ask only for a term plan that is the cheapest and tenure covered. If planning to still go ahead with other types of life insurance then ask for total expenses and check the expense ratio, any extra charges, benefits, tenure, withdrawal policies, surrender charges and claim settlement.

Illustration: Uttam Ghosh

Besides asking the usual questions or researching the usual like past track record, fund manager, expense ratio and others it is also important to understand:

• The objective of the fund
• Portfolio of the fund
• Not necessary to invest in new fund offers (NFO) because you will definitely not miss the boat
• Select the fund type, which will help you in achieving your goals

If your distributor suggests churning your portfolio often do so only if required and not just as there is a new fund and you will get units at Rs 10. Also if you are advised a fund just because it has recently announced dividend do look at past dividend history and also past track record and at the portfolio and then only invest in it. As many a times this dividend is just one off and your investment is stuck in bad fund.

One more avenue where investors have lost huge amounts. Here are some checkpoints before you invest in bank FDs:

• Check past history of the promoters
• Check rating of the deposit
• Do not be lured by high rates of interest
• Preferable not to invest for more than 3 years unless exceptional rating and past record of the company
• Do keep a constant track of the company as it is very important. On first sign of any trouble you know it is time to get out.

In case of any problems do lodge a complaint with the Economic Offense Wing of the police so in case of any recovery of funds you might stand a chance of recovering the funds.

Illustration: Uttam Ghosh

For Gold ETF

Do remember that on redemption unless you have units which is equal to 'Creation unit' as set by fund house your units will be redeemed and money directly credited to your account like any other ETF. The creation size can be anywhere between 100 units to 1,000 units depending from fund house to fund house and if the number of units are equal to creation size then your units can be redeemed into physical gold and cash whichever option you select. So do check the creation size of the fund house. Also select gold ETF based on expense ratio as gold ETFs follow international gold prices and only difference between funds is their expense ratio.

Loans

Besides scouting for best interest rates it is also very important to check the after-sales service of the bank you have selected. Also check how many times a year can they raise the rate of interest on your loan. Many a times bank do not decrease the rate of interest when the rate of interest has fallen.

Check with the bank about the same. Also very important to check how often does the bank send the loan EMI statement. Individuals with high loan amounts do keep a check on new rates of interest and new schemes as offered by your own bank or by different bank as at the time of shifting to new schemes by paying administration cost works out to be cheaper. Do remember that if you say this then the bank has to change the scheme. They will deny but they have to do it.

Financial planning

First of all financial planning and investment planning are not different. Investment planning is a part of financial planning. Ask as to what all they do in financial planning. All the aspects of finances in an individual's life have to be covered. Remember that profiling you into a category and then just advising you about investments is not financial planning.

Financial planning involves loads of factors mentioned above. So do check what services they offer and then decide.