There are some simple rules to investing, but it becomes difficult when we try to do something beyond our understanding. A perfect example of this is misselling. And to answer how we often become the subject of mis-selling, Chenthil Iyer, SEBI Registered Investment Advisor, said, “Financial awareness in India is very low and hence it is very easy to motivate people to buy those products. which are unsuitable or irrelevant to them.”
How do we buy the wrong products?
Tax Season: The January-March quarter of the financial year is the period when most investors plan their tax-saving investments at the last minute. And in a hurry, investors buy any financial product sold to them that can save tax, and the most common are life insurance endowment plans. This is a classic example of misselling.
“These are highly inefficient from investment point of view and give very low returns over a long period of more than two decades! Once one has entered these products there is a very high exit load as the surrender value is only a fraction of the amount invested Iyer explains
Promise of very high return on investment: Individuals are attracted to a high return on investment regardless of the risk that comes with it. “Therefore, risky products such as deposits in chit funds, low standard local co-operative societies etc. which can bear high interest rates but have a high risk of default, come to light only when there is a large default. ”, he insists.
Investing without a goal: One of the major reasons we attract the wrong products to our portfolio is that most of us do not follow a goal-based approach with a reasonable investment horizon.
For example, a financial product such as an equity mutual fund would not be suitable for investors with a short investment period. But sometimes we are tempted to invest in them, often by friends and peers, because they are providing good returns in a bull market.
Now, it is less misselling and more misinformation because your friends or peers are not getting any monetary reward from it. But, if you look at the bigger picture, it is doing this to prove its investment potential. And, in doing so, your friend is actually selling a wrong product the wrong way.
How can we protect ourselves from being unfairly sold?
There are two parties involved in mis-selling – buyer and seller. While it is the responsibility of the regulators to manage vendors through regulations; The buyer is responsible for the use of these terms.
On how we can protect ourselves, Renu Maheshwari, Chennai RIA from Finscolarz says, “There is no free lunch. If someone is giving free service, then understand from where he will earn money. If you are not paying for the Services; So you are being sold (might also be sold wrongly).”
An investor should engage only with registered and regulated entries such as SEBI registered investment advisors who operate under the stringent investor protection standards set by SEBI, she adds.
There are a lot of checks and balances in the existing system for the investor to protect himself. Educate yourself and stay safe!
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