My friend was upset with the mutual fund product he had bought. He needed the money and the value he was getting was much lower than what he had invested. Even before I began to ask what it was that he bought —he said that his agent told him that the loss would be steep if he stopped paying. That got my antenna up. What are you paying, I asked. He said monthly installment. Is it an insurance? No no, it is a mutual fund scheme, he said and went on to name the firm.
After a few minutes of animated argument, I asked to see the product name. Sure enough, it was a Ulip as I had long guessed. You are from the industry and so you know these things, but how should a simple investor like me know these things, he protested. Being simple is fine, being a simpleton is being foolish. I did not say that.
But that is not an isolated instance. I have had people tell me that the name of their product is SIP. When a neighbour called in panic about a margin call in a market crash, she did not know that futures trading was beyond the fun of clicking in front of the screen. Another told me he ended his one year SIP and proceeded to redeem all the units. It is a one year plan and it is over he declared. Another called to complain that her CA is asking that she pay taxes on every trade she made. Why is this unreasonable tax being levied and how will they know if I dont pay, she had the audacity to ask. Just yesterday a friend texted me to say that he has set up four SIPs through a relationship manager of a mutual fund. When I asked him how one fund can take money for another fund’s product, he went blank. Not possible is it? Have I been conned, he panicked. I asked him to pull out the business card of the person he dealt with and read the firm’s name. It was a bank. But it is the same thing, right, they are all the same brand, he remarked. This man is a professor at a leading university.
Any amount of financial literacy training does not seem to help fix this simple problem of knowing what one is buying and from whom. The same people will know the technical names of a dozen medicines and drugs; they will hold forth with great ease about calories, carbs and cardio; they will know the street names of the entire neighbourhood of the city their child studies in, without having visited even once. But investing remains complex and complicated, or they simply don’t invest the time and effort before investing their money. Let’s begin with some pointers.
First, know the difference between product and process. When you buy a fixed deposit, an equity share, a mutual fund, an insurance policy, a bond, you are buying a product. When you open a trading account with a broker, when you open an investment account with a banker or broker you are signing up for a process.
Second, ask for and know the entire trail of your investment. What happens to the money? If your broker sells you a fancy sounding exclusive product, specifically curated for a select set of customers like yourself, cut through that sales talk and ask what happens to the money. You must know who will utilise your money and what they will do with it.
Third, recognise who is an intermediary and know what their role is in the scheme of things. If a banker is talking to you and is asking you to make a fixed deposit, he is selling you a product of the bank. If he is instead asking you to buy something offered by someone else (third party product) he is the distributor. You must know what the product is and who is finally going to manage your money.
Fourth, every facility offered to you is to make a transaction easier to execute. That is a service being offered for a fee. It is not the product you are buying. No sir, SIP is a facility to invest in a fund; it is not a product. A broking account enables you to buy products like equity, bonds and derivatives. The broker is only selling you a process to buy those products. Do not mistake the name of the service for a product.
Fifth, ask questions. Everyone dealing with you is expected to explain. Exercise that right. Know the name of the product. Ask for performance history. Seek comparisons. Take time to decide. Every intermediary that makes you a recommendation will say it is backed by research. Ask to see that research.
Sixth, verify the credentials of everyone dealing with you. Do not appoint or change an adviser or distributor without checking and seeking references. Shun distributors who will meet you only when they have something to sell. Push back if they persuade you to decide quickly. The market is filled with sellers and you can take your time to choose who you want to deal with.
Seventh, make sure your money’s final destination is of good quality and matches what you need. If it is an equity share, make sure you know what you are buying and are not acting on a whimsical tip. If it is a mutual fund, make sure you have checked the track record of performance. If it is a bond, make sure the issuer is of good credit quality. If it is insurance, ensure you really need it.
Eighth, do not focus too much on the jaded questions of what is the return and what is the safety of the principal. Capital markets have moved much beyond these entitlements and privileges. Nor is it a benevolent place showering you with favours. There is a market seeking your money to deploy it in competing assets. It is your money, and you have the power to choose. Make it an informed choice. Begin by asking the name of the product and the issuer. At least that.
(The author is chairperson, Centre for Investment Education and Learning.)