3 ways we are sold bad investment products. How to avoid these

Investments have some simple rules but, it becomes tricky when we try to do something beyond our understanding. A perfect example of this is mis-selling. And to answer how we often become subjects of mis-selling, Chenthil Iyer, SEBI Registered Investment Advisersaid, said “Financial awareness is very low in India and hence it is very easy to con people into buying products that are unsuitable or irrelevant for them.”

How we end up buying the wrong products? 

The tax season: The January-March quarter of the financial year is the period when most investors plan their tax-saving investments at the last minute. And in haste, investors tend to buy any financial product sold to them that can save tax, and the most common being life insurance endowment plans. This is a classic example of mis-selling.

“These are highly inefficient from the investment perspective and bears very low return over long periods of over two decades! Once entered these products have very high exit loads as the surrender values are just a fraction of the invested amounts,” Iyer explains

Promising very high return on investment: Individuals get attracted to high return on investment without caring about the risk that comes along with it. “Therefore, risky products such as deposits in chit funds, low standard local cooperatives etc that may bear high-interest rates but can have a high risk of default get sold, which comes to light only when a major default happens,” he asserts

Investing without a goal: A major reason for attracting wrong products in our portfolio is the fact that most of us don’t follow a goal-based approach with a proper investment horizon. 

For instance, a financial product such as an Equity Mutual Fund would not be apt for short investment duration investors. But at times we are pitched, most often by friends and peers, to invest in them just because they are providing good returns in a bull market.

Now, this is less of a mis-selling and more of misinformation as your friend or peers are not getting any monetary reward from it. But, if you look at the big picture, he/she doing it to prove his/her investment acumen. And, in order to do that, your friend is actually mis-selling an inaccurate product. 

How we can save ourselves from being mis-sold?

Mis-selling involves two parties – buyer and seller. While it is regulators’ responsibility to manage the sellers through rules; the onus of taking making use of these rules lies on the buyer.

On how we can save ourselves, Chennai RIA Renu Maheshwari of Finscholarz explains, “There is no free lunch. If someone is providing free service , understand where is he / she will make money from. If you are not paying for the services; then you are being sold (can be mis-sold as well).”

An investor should only engage with Registered and Regulated entries e.g. SEBI Registered Investment Advisers who work under stringent investor protection parameters prescribed by SEBI, she adds

There are lot of checks and balances in the current system for the investor to protect themselves. Educate yourself and stay safe!

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