Invest time and effort before investing your money: 8 points to make sure you’re using your money the right way
My friend was upset with the mutual fund product he purchased. He needed the money and the value he was getting was far less than what he had invested. Before I even started asking him what he bought, he said his agent told him the loss would be huge if he stopped paying. It raised my antenna. What are you paying for, I asked. It said monthly installment. Is it insurance? No no, it’s a mutual fund, he said and went on to name the company.
After a few minutes of heated discussion, I asked to see the name of the product. Indeed, it was an Ulip as I had guessed for a long time. You come from the industry and therefore you know these things, but how should a mere investor like me know these things, he protested. To be simple is good, to be simple is to be stupid. I did not say that.
But this is not an isolated case. I’ve had people tell me that their product name is SIP. When a neighbor called in a panic about a margin call during a stock market crash, she had no idea futures trading was beyond the fun of clicking in front of the screen. Another told me that he terminated his one-year SIP and proceeded to redeem all units. It’s a one-year plan and it’s over, he said. Another called to complain that her board is asking her to pay tax on every transaction she made. Why is this unreasonable tax being levied and how will they know if I don’t pay, she had the audacity to ask. Just yesterday, a friend texted me to say he had set up four SIPs through a mutual fund relationship manager. When I asked him how a fund can take money for another fund’s proceeds, he was left blank. Not possible is it? Was I fooled, he freaked out. I asked him to pull out the business card of the person he was doing business with and read the name of the company. It was a bank. But it’s the same thing, okay, they’re all the same brand, he pointed out. This man is a professor at a major university.
Not all financial literacy training seems to help solve this simple problem of knowing what to buy and from whom. The same people will know the technical names of a dozen medicines and drugs; they will talk with ease about calories, carbohydrates and cardio; they will know the street names of the whole area of town where their child is studying, without having visited once. But investing remains complex and complicated, or they simply don’t invest the necessary time and effort before investing their money. Let’s start with some pointers.
First, differentiate between product and process. When you buy a fixed deposit, a capital 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 a broker, you sign up for a process.
Second, ask for and know the full trace of your investment. What happens to the money? If your broker is selling you a fancy-sounding exclusive product that is specifically designed for a select group of clients like you, go through that sales interview and ask what happens to the money. You need to know who will use your money and what they will do with it.
Third, recognize who an intermediary is and what their role is in the scheme of things. If a banker talks to you and asks you to make a fixed deposit, he is selling you a bank product. If he instead asks you to buy something offered by someone else (third-party product), he is the distributor. You need to know what the product is and who is ultimately going to manage your money.
Fourth, each facility offered to you is intended to facilitate the execution of a transaction. This is a service offered for a fee. This is not the product you are buying. No sir, SIP is a facility to invest in a fund; it is not a product. A brokerage account allows you to buy products such as stocks, bonds and derivatives. The broker only sells you a process to buy these products. Do not confuse the name of the service with a product.
Fifth, ask questions. Everyone dealing with you has to explain themselves. Exercise this right. Know the name of the product. Ask for performance history. Look for comparisons. Take the time to decide. Every intermediary who gives you a recommendation will say it’s backed by research. Ask to see this research.
Sixth, check the credentials of everyone who deals with you. Do not appoint or change your advisor or distributor without checking and researching references. Avoid distributors who will only meet you when they have something to sell. Push back if they persuade you to decide quickly. The market is full of vendors and you can take your time choosing who you want to deal with.
Seventh, make sure the end destination of your money is of good quality and what you need. If it’s an equity share, make sure you know what you’re buying and don’t follow fancy advice. If it’s a mutual fund, make sure you’ve checked the performance track record. If it’s a bond, make sure the issuer is of good credit quality. If it’s insurance, make sure you really need it.
Eighth, don’t focus too much on the blasé questions of what is the return and what is the security of the principal. Financial markets have gone well beyond these rights and privileges. Nor is it a benevolent place that showers you with favors. There is a market looking for your money to deploy in competing assets. It’s your money and you have the power to choose. Make it an informed choice. Start by asking for the product name and issuer. At least that.
(The author is president of the Center for Investment Education and Learning.)