CHENNAI: Investing in various financial products and packages can be extremely intimidating for investors. Often people sign on the dotted line without completely understanding the terms and conditions associated with different financial packages. Many fall prey to the false promises and exorbitant returns that are ‘guaranteed’ in various schemes.
In order to avoid being lured by advertisements and smooth talking fraudsters, investors should first read all offer documents to understand how the financial product is structured. CE spoke to investment advisors at iThought Financial Consulting to get a fix on what investors can look out for while signing up for different financial products.
“One should have a thorough understanding of the associated costs, risks, and the expected returns,” said investment advisors at iThought Financial Consulting.
Every investor must know whether the product is suitable for their investment needs, and should have clarity on the terms and conditions if they would like to stay invested or exit. Many products may have an exit load (a penalty for premature exit) or lock-in period (time during which investments cannot be liquidated). It is also important to review the track record of the financial product to see if there was any misrepresentation in the past.”
While access to information and financial advice is available aplenty on the Internet and social media, the jargon that surrounds personal finance can be confusing and overwhelming.
Further, as financial literacy isn’t a part of any school or college-level education curriculum, counsel is sought from friends, family or colleagues rather than professionals. However, approaching an advisor could make for a good option but people should make sure that the advisors are registered with the regulator. Speaking to a trusted advisor could help understand the ‘why’ and ‘what’ aspects of their finances.
A good tip is to make all payments of advisory fees through banking channels only and maintain duly signed receipts mentioning the details of your payments. Always ask for your risk profiling before accepting investment advice and insist that investment advisor provides advice strictly on the basis of your risk profiling and takes into account the available investment alternatives. Assess the risk-return profile of the investment as well as the liquidity and safety aspects before making investments. Insist on getting the terms and conditions in writing duly signed and stamped. Read the terms and conditions carefully, particularly regarding advisory fees, advisory plans, category of recommendations and so on before dealing with any advisor.
Red flags that investors should look out for could appear in many forms. For starters, it may be worthwhile investigating why the charges or brokerage are higher for a product compared to other products in the same category.
“An investor should avoid products where the exit conditions are not clear or if they do not suit the investment purpose (i.e. long lock-in periods for short-term investments),” the advisors said. “Investors should remember that anything that looks too good to be true probably has hidden risks or costs associated. One should also verify if the financial product has been approved by the regulator (for example, insurance products by IRDAI).”
If you are an investor who is looking to invest and analyse your risk appetite, a financial plan could be a good place to start to become aware of your risk profile and financial needs. “Working with a professional, at least in the initial stages, will lay a strong foundation. As with any field, personal finance is dynamic and every investor must consistently update their knowledge,” the advisors said. “This could be done by reading columns, watching videos, participating in investor awareness programmes, etc. Alternatively, continuous engagement with an advisor will keep you well informed and enable better selection of financial products under professional guidance.”
Don’ts while dealing with investment advisors
1. Do not deal with unregistered entities.
2. Don’t fall for stock tips offered under the pretext of investment advice.
3. Do not give your money for investment to the investment advisor.
4. Don’t fall for the promise of indicative or exorbitant or assured returns by the investment advisors. Don’t let greed overcome rational investment decisions.
5. Don’t get carried away by luring advertisements or market rumours.
6. Avoid doing transactions only on the basis of phone calls or messages from any investment advisory or its representatives.
7. Don’t take decisions just because of repeated messages and calls by investment advisors.
8. Do not fall prey to limited period discount or other incentives, gifts, etc. offered by investment advisors.
9. Don’t rush into making investments that do not match your risk-taking appetite and investment goals.
10. Do not invest without understanding your risk appetite.
SOURCE: SEBI Investor guidelines