MIS-SELLING BY INSURANCE AGENTS, BEWARE OF SMOOTH TALKING!
August 30, 2019
WEALTH AND INCOME PARADOX
August 30, 2019MIS- SELLING OF MUTUAL FUNDS
BEWARE OF SMOOTH TALKING AND FANCY ADVERTISMENT!
Mutual fund mis selling is done by MF Companies or agents. Let us look at few popular mis selling of
mutual funds
1) NEW MUTUAL FUND NFO
This is nothing but a great marketing gimmick. Existing Mutual funds have many schemes targeted at various types of equities and debt instruments. Either it could be market cap based [large cap, Mid cap etc] Or it could be sector based [Banking, FMCG etc] or it could be any other sector or thematic. With this new NFO , the investors lose huge amount of their money in terms of commission to agents and Distributors. It could be as high as 5-6% of the money invested. Further, typical NFO being closed ended, your money gets locked for longer duration too.
2) EQUITY FUNDS ARE SHOWN WITH GREAT RETURNS IN THREE YEARS
MF houses bring out huge advertisements in popular journals great performance of the fund in 1 -2 years. This is very misleading. After a bear market, equity markets may show good returns in the short period of 1-2 years. And, there is no guarantee that such returns can be sustained for longer period.All equity related investments are for 5-7 or even 10 years.Short term success is no indication of its ability to sustain long term success.
3) PUSHING SMALL CAP, MIDCAP OR SECTOR FUNDS
All funds which operate in certain market caps like SMALL or MID or certain sectors like FMCG, INFRA etc go through cycles in the market.The performance may be attractive in the short run, but, will it sustain for longer duration of 7-10 years? Can you hold for long periods? And, it is not for those who are in 50 years plus bracket as the short term risks are high.
4) DIVIDEND ANNOUNCEMENT
Dividends have no meaning in mutual funds, as the mutual fund is for long term appreciation. The dividend declared is nothing but returning back some of your own appreciated amount .Further, after paying IT on dividends, what you get less than the appreciated amount.Such dividends are not sustainable in a depressed market. You can go in for SWP in case you want regular income from MF , which is more tax efficient too.
5) INVESTING IN ELSS BEYOND RS.1.50 LACS
ELSS is one of the instruments to save IT, but, up to Rs 1.50 lacs only.Beyond that it may appreciate, but, your money gets locked up for three years plus.You can as well go in for more suitable funds which do not have such lock in period.Example- Multi cap funds.
If anyone trying to push ELSS beyond Rs 1.50 lacs, say NO.
6) PERSUADING TO SHIFT FROM ONE FUND TO ANOTHER
To achieve short term success, few agents of Managers may ask you to shift from one fund to another. While doing that the following need to be kept in mind.
-Have you looked at tax implication? You may end up with IT payments if not held for at least one year and some IT if held beyond one year too.
-What about the agent’s commission for each new application?
7) PUTTING MULTIPLE APPLICATIONS FOR SAME FUND
Please remember that for each new application there is a minimum commission that you need to shell out. Multiple applications mean multiple payments.
8) SUGGESTING MF INVESTMENTS WITH OUT LOOKING AT YOUR PROFILE
Mutual funds are great investment vehicle, but the following must be kept in mind.We do not give same food for all people with any age or health profile.Similarly, same MF can not be offered to all.
-Risk profile of the investor. [Both risk taking ability and risk aversion]
-Age of the investor, as some schemes are not suitable if you are older
-Goal of the investor- like retirement, tax saving, children’s education etc
-Minimum holding period may vary from 5-7 years to get decent returns.
9) OVER SELLING MIP MUTUAL FUNDS
MIP[Monthly Income Plan ] is nothing but a Hybrid fund with 25-60% equity content. If the equity content is less, the price fluctuation would be low and if it is high, the price fluctuation would be high.
There is nothing like “income” from MIP funds.The payment outflow is nothing but returning back your own money either as dividend or SWP route.
Some agents push for STP with MIP SWP.This will result in multiple commissions for the same transaction if routed through an agent.
10) OFFER TO DEPOSIT YOUR MUTUAL FUND APPLICATIONS
Some agents and Banks offer “free “deposit of your MF application with the MF office. Please remember, there is nothing free and you end up paying commission on short term or even long basis.This could work out to be millions at the end of 20-30 years!
