For some time, Vijay just sat and wished he hadn’t sold off that property. It was an investment he had made some years ago — when the real estate market had just started warming up and he had received a good rate from the builder.
Now five years later, his asset was worth almost three times the price he had paid. But just like flies come flocking to honey, he was besieged by a plethora of financial advisors — all of them trying to sell their products.
Vijay was a doctor trained in medicine, not finance. But even to someone like him, the chances of mis-selling an investment product seemed very high.
Vijay’s neighbour, an insurance advisor, suggested a limited premium paying ULIP plan. Now the ULIP has the following charges: Premium Allocation Charge, Mortality Charge, Policy Administration Charge; Fund Management Charge and also a Surrender Charge. The nature of deductions was kept silent from Vijay.
What was stated was at the end of the period, the corpus will be generated. Even here the compounded annual growth rate was not mentioned. A perfect case of mis-selling .
This was just the beginning, as Vijay discovered. One of his cousins was a mutual fund advisor. He suggested investing the entire amount in equity mutual funds — at one go.
He also suggested 7-9 schemes of various fund houses to Vijay. What he didn’t tell Vijay was that investing a large corpus in shares at one go can be a recipe for disaster — think of all the investors who invested in late 2007 and early 2008.
Also, Vijay couldn’t understand why he should invest in 7-9 different schemes if these mutual funds all invested in similar shares had similar investment strategies.
Others also noticed his good fortune — including his banker. His branch manager introduced him to a relationship manager, offering advice on exotic products such as private equity and alternate assets.
Avenues for investment
The relationship manager suggested two options — a large investment in an art fund and another similar lot in a private equity fund floated by a financial firm.
Again, the information on upfront charges, hurdle rate and success fees for managing the fund was not mentioned. Also, the estimated return — which was aggressive, was quoted almost as if it were a guaranteed return. The main attraction — as it seemed to Vijay, was the glamour in being associated with an exotic financial product.
Cut out on risk
Fortunately for him, the relationship manager didn’t know of foreign currency derivatives, otherwise even that would have been sold to Vijay. Not to forget, Vijay’s banker had also approached him to give him advise on investing the corpus in the bank’s fixed deposit and also insurance scheme besides the mutual funds.
The wisdom of putting the entire amount in fixed deposits — which give less returns as compared to inflation — was not mentioned.
Thoroughly confused, Vijay now approached one person whom he trusted — a senior doctor. He said nothing — just pointed towards the clinic’s logo — the first rule of medicine: Do no harm.
The message was clear — before you can embark on a journey to build up wealth, you need to ensure you don’t make any bad choices.
Based on his experience with the assorted planners, Vijay also realised one truth — before he could invest, he needed to understand clearly the products he was investing in.
(Brijesh Damodaran is the founder of WealthWays private wealth management.)