You will find some black sheep in every industry, and the financial industry is no exception. As a young investor, you can easily get fooled into making bad investments if you are not careful. Small mistakes can do significant harm to your finances in the long run. In this article, we discuss the many ways financial companies and their salespeople fool innocent investors so that you can save yourself from costly mistakes.
Trap # 1: An investment that comes with a FREE insurance cover:
ULIPs have proven to be the most abused financial products in the past couple of decades. The financial companies run massive TV and print marketing campaigns for these products. The cost of these campaigns is built into the product structure. Most likely, the agent sells these products as “investment product” with the additional benefit of “FREE insurance cover”. The reality is that insurance is not free. You pay a “mortality charge” for the same. Other charges like premium allocation charge and a rigid structure doesn’t make them a worthy investment too.
Trap # 2: Heart-touching ads on planning child’s education and retirement:
Financial companies have the pulse of emotions of the middle-class investor. They design clever marketing campaigns and heart touching advertisements to exploit that anxiety regarding the inability to accumulate enough funds for your child’s education or your own retirement. Gullible investors fall for those ads and end up committing their precious savings into inferior products. Remember, you can plan all your goals through low-cost avenues like mutual funds and NPS. Choosing these insurance-cum-investment avenues serve just one purpose – messing up your financial life. The choice is yours.
Trap # 3: Return is “GUARANTEED”:
Indians are a conservative lot when it comes to saving and investing. That’s why you find a disproportionate allocation to fixed deposits and gold. Both these avenues are safe, but they don’t grow your wealth. Regarding ULIPs, tighter norms and reduction of upfront commissions mean that agents don’t sell these products. Instead, they push “guaranteed return” traditional plans. The investor doesn’t bother to check the poor Internal Rate of Return (IRR) of such products. If the next time you come across the word “guaranteed” in a product advertisement, the guarantee may just be to mess up your finances.
Trap # 4: A term insurance that refunds your premium:
Term insurance is the simplest way that a middle-class investor can protect the interests of his family. However, some investors don’t understand that you don’t get anything back if nothing happens. Unscrupulous agents sell “With Return of Premium (WROP)” term insurance products to exploit this tendency. The problem with these products is that the premium is way too high than pure term insurance. The return on this additional amount is way less than even a fixed deposit. A better approach is to go for pure term insurance. Invest the additional money into good equity mutual fund schemes.
Trap # 5: “Tax Saving” investments:
Tax saving is another big fishing net for these companies. Financial companies run massive tax saving campaigns in the last quarter of the financial year. The aim is to dump all kind of toxic products like ULIPs, traditional insurance plans, bank fixed deposits etc. The target is investors who’ve woken last minute and are desperately looking for tax-saving investments. Result: While the agent walks away happily with his commission, the investor is saddled with toxic financial products for the rest of your life.
Trap # 6: Free Demat account, credit cards, reward points and pre-approved personal loans:
The word “FREE” is an often-used marketing strategy by companies to exploit the tendency of people to lap up everything that’s offered for free. The free Demat account is to get you started into trading so that they can earn a brokerage on your trades. The aim of free credit cards and reward points is to make you transact on your card. When you delay your payments, the bank can earn a hefty late payment fee and interest. A pre-approved loan is not a favour the bank does on you. It helps them earn their income and meet their sales targets.
Trap # 7: New fund Offers in Mutual Fund:
Given the transparency and low-cost nature of these products, the possibility of misselling is comparatively low in this space. But still, you can find mutual fund companies launch new funds every once in a while. The aim is to garner more business. The sales pitch for NFO is that the NAV is so cheap – only INR 10. Remember: NAV has nothing to do with the returns from the fund. It is better to stick to schemes with a decent performance track record. Be suspicious when your agent frequently asks you to sell existing schemes and buy new schemes. The objective may most likely just be to help him meet his sales targets.
Knowledge is power, and it cannot be more accurate when it comes to money matters. As a young investor, the time and effort you invest in learning about money management will help you identify various tricks and marketing gimmicks that financial companies play. You need to also be aware of the grievance redressal mechanism set up by various regulatory bodies to get a timely redressal to your grievances.
Plan your financial future using